What are Qualified Institutional Buyers (QIB) in an IPO?

Qualified Institutional Buyers (QIBs) are large financial entities such as mutual funds, banks, and insurance companies that have the expertise and resources to invest substantial sums in the capital markets. As per Initial Public Offering (IPO), the QIBs play a crucial role by buying large blocks of shares and providing the offering with credibility and financial stability. 

Because of their deep pockets and extensive knowledge of the market, the QIBs are often prioritized by companies issuing the IPOs. Regulatory bodies often set specific criteria for QIBs, ensuring that only those with significant investment experience and financial strength participate in these high-stakes transactions. In this blog, we will give a detailed overview of the Qualified Institutional Buyers (QIBs), eligibility criteria and their advantages and disadvantages.

Who are Qualified Institutional Buyers (QIB)?

Qualified Institutional Buyers (QIBs) are a category of sophisticated investors with expertise and financial resources to invest in public issues, particularly during an Initial Public Offering (IPO). The term “QIB” stands for Qualified Institutional Buyers, encompassing entities like mutual funds, pension funds, insurance companies, banks, and foreign institutional investors. These buyers possess the expertise and resources to evaluate investment opportunities and make significant financial contributions to the market.

In an IPO, companies often reserve a specific portion of shares exclusively for QIBs. This allocation to QIBs not only provides stability to the IPO but also enhances investor confidence, as institutional buyers bring credibility to the offering. QIBs can bid for shares in an IPO without restrictions, unlike individual retail investors, who have limits on investment amounts. Their large-scale investments and institutional knowledge significantly influence the success of public issues.

To qualify as a QIB, the investors must meet certain criteria outlined by regulatory bodies like SEBI (Securities and Exchange Board of India). These qualifications ensure that QIBs possess substantial financial strength and investment experience, which are essential for high-stakes investments.

Furthermore, the QIBs must hold a Demat Account and an electronic account that facilitates the buying, holding, and selling of shares. This account is essential for participation in IPOs, as all shares are allocated electronically. In summary, Qualified Institutional Buyers (QIBs) are major players in IPOs, offering financial strength and market confidence and helping companies raise substantial capital for expansion and growth. 

Read Also: Anchor Investors in IPOs – Meaning, Role & Benefits

Regulations on Qualified Institutional Buyers

There are a wide range of rules and regulations governing the QIBs; the most significant regulations are listed below:

1. Any listed company in the domestic market can place its securities with the recognized QIBs. However, the company cannot raise funds through QIBs if the company does not have equity shares listed on stock exchanges and does not comply with the prescribed minimum public shareholding patterns.

2. SEBI has comprehensive regulations for the relationship between a company looking to raise funds and its chosen QIB, with strict norms for both allottees and investors. The QIBs linked to the promoters of the company cannot participate in the QIB category.

QIB – Advantages and Disadvantages

The advantages and disadvantages of QIBs are listed below:

Advantages of QIB

• Accessing the large Investment opportunities: QIBs can invest large sums of money in private placements, IPOs, and following public offerings (FPOs).
• Better pricing: The companies will prioritize the QIBs as per their financial strength and strategic importance as it will give you favorable pricing with higher allocations in public and private offerings.
• Risk Mitigation: The QIBs will have a team of experts and analysts who help them in better risk management by conducting the due diligence before investing.

Disadvantages of QIB

• Increased Scrutiny: QIBs are under constant regulatory monitoring as per the market regulations, having a significant impact on their investment decisions. 
• Impact on existing shareholders: QIBs invest large amounts of money, which can dilute existing shareholders’ stake in the company.

How Qualified Institutional Buyers Work?

Qualified Institutional Buyers (QIBs) work by leveraging their significant financial resources and investment expertise to participate in public offerings, especially IPOs. These institutional investors, including mutual funds, insurance companies, banks, and pension funds, purchase large blocks of shares and provide the essential capital to companies going public. In an IPO and a reserved quota often around 50% is allocated specifically for QIBs as their investments lend stability and credibility to the offering.

When bidding in IPOs, QIBs analyze potential returns and risks and leverage their market knowledge to make well-informed investment decisions. Their active participation often attracts other investors, but their substantial shareholding can impact market prices if they choose to sell or adjust their investments. 

Who is Classified as QIB in an IPO?

SEBI will establish the standards for all the entities only if they have the necessary financial resources to participate in these offerings. These entities include:

• Scheduled Commercial Banks (SCBs)
• Public Financial Institutions
• Foreign Institutional Investors registered with SEBI
• Mutual Funds
• Foreign Venture capital Investors (VCs) registered with SEBI
• Domestic Venture capital Investors registered with SEBI
• SIDCs, known as the State Industrial Development Corporations
• Provident funds with a minimum investment of Rs 25 Crores
• IRDAI (Insurance Regulatory and Development Authority of India) will provide insurance products in India.

What are Some of the Advantages that QIBs in an IPO Get to Enjoy?

Qualified Institutional Buyers (QIBs) enjoy several advantages when participating in an IPO, given their status as sophisticated and financially powerful investors. One primary advantage is the reserved quota for QIBs in many IPOs. Issuers often set aside a substantial portion, typically around 50%, in a book-building IPO exclusively for QIBs. This gives them priority and ensures they can secure large allocations that may not be as easily accessible.

QIBs are experienced and well-informed about market risks. This flexibility allows QIBs to act quickly and make large transactions efficiently, backed by thorough research and professional insights. Additionally, QIBs wield significant influence in IPO pricing. Their high volume bids often guide the final price as companies and underwriters view QIB participation as a measure of an IPO’s demand. This influence extends to secondary markets as well, where QIB investments bring credibility, attract other investors, and stabilize stock prices. 

Read Also: What is IPO Subscription & How Does it Work?

Conclusion

Qualified Institutional Buyers (QIBs) perform a unique role in IPOs and enjoy significant advantages due to their financial strength and expertise. With priority access to reserved shares and an influence over IPO pricing, QIBs play a crucial role in stabilizing and promoting initial public offerings. 

Their involvement not only boosts investor confidence but also attracts further investment and benefits both the issuing company and the broader market. These privileges enable QIBs to act strategically and allow them to optimize returns and adapt swiftly to market dynamics, further reinforcing their impact on the success and credibility of IPOs. 

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