General Manager
Corporation Finance Department
Division of Issues and Listing I
((Direct) : 26449350
Email : neelamb@sebi.gov.in
CFD/DIL/SM/98649/2007
July 13, 2007
Shri Ravi Kapoor
Managing Director
India Head Equity Capital Markets
Citigroup Global Markets India Pvt. Ltd.
Bakhtawar, 4th Floor
Nariman Point
Mumbai- 400 021
Dear Sir,
Subject : Request for interpretative letter under SEBI (Informal Guidance) Scheme, 2003- SEBI (DIP) Guidelines regarding Qualified Institutions’ Placement(QIP)
1.0 Please refer to your letter dated May 29, 2007 seeking informal guidance under the SEBI (Informal Guidance) Scheme, 2003.
2.0 Vide your abovementioned letter, it is inter alia submitted by you that:-
2.1 The QIP Guidelines require each placement of securities issued through QIP to be done on a “private placement basis” in compliance with the requirements of first proviso to clause (a) of sub-section 3 of Section 67 of the Companies Act, 1956. The relevant section of the Companies Act provides that an offer or invitation to subscribe for securities made to 50 or more persons will be treated as a public offer of securities.
2.2 The 50 person limit in the Companies Act has raised an issue that has a significant impact on the marketing of QIP placements and its effectiveness as a method of fund raising. Specifically, there is a divided view on the interpretation of what constitutes an offer or invitation.
2.3 One view is that the distribution distribution of preliminary placement documentation and a bid cum revision form to potential investors would constitute an “offer” or “invitation”. This view would then limit the distribution of any and all QIP documentation and the marketing of any issuance to not more than 49 investors.
2.4 The other view is that the preliminary placement documentation and bid cum revision form merely represent information provided to select QIBs to indicate that the issuer is evaluating investor interest. It is only upon the issuance of a Confirmation of Allocation Note (CAN), after which investors may submit binding offers by formally completing application forms, which an offer or an invitation is made. In this second view, a greater number of investors can be contacted to assess interest in a particular offering.
2.5 Currently, because of the divergent views,there is confusion within the market that is hampering the development of the QIP model and may be unnecessarily restricting the ability of Indian corporates from raising capital.
2.6 The first view acts as an impediment for potential issuers to pursue large fund raisings from the domestic markets. For example, an issuer intending to raise US$300 MM or more through the QIP route may find the limitation on the ability to approach no more than 49 investors as a significant restriction in the ability of any issuer to gauge interest from possible investors, increasing the risk of an unsuccessful or aborted fundraising. Such potential issuers may therefore seek funds through a GDR/ADR route thereby depriving the domestic markets of additional liquidity and domestic investors of quality securities.
2.7 Since QIP offerings are only marketed to QIBs you submit that the more restrictive view of the 50-person limit may not be necessary given the level of sophistication of the investor base.
3.0 You have requested for clarification supporting the view that the 50-person limit would apply only to the recipients of CAN and the final allotment of securities and not to recipients of the preliminary placement documentation.
4.0 We have considered the submissions made by you in your letter under reference and without necessarily agreeing with your analysis, our views on the issue are as under:
4.1 In terms of section 67(3) of the Companies Act, 1956, an offer or invitation to subscribe for shares or debentures is made to fifty persons or more is regarded the offer made to public.
4.2 Clause 13A.7.3 of the SEBI (Disclosure and Investor Protection) Guidelines, 2000 {SEBI (DIP) Guidelines} stipulates that the placement document shall be a private document provided to select investors, through serially numbered copies. Further, the placement document should have a disclaimer to the effect that it is in connection with an issue to QIBs under chapter XIII-A of the SEBI (DIP) Guidelines and that no offer is being made to the public or to any other category of investors.
4.3 In our view, a combined reading of the relevant provisions of the Companies Act, 1956 and the SEBI (DIP) Guidelines clearly indicate private placement to mean an offer or invitation to subscribe for shares or debentures to less than 50 persons. Even a preliminary placement document and a bid cum revision form placed with the select QIBs under the SEBI (Dip) Guidelines would constitute an offer or invitation to subscribe to the securities.
4.4 The process of issuance of CAN and the final allotment to the QIBs would constitute the actual allotment to the investors and not an offer or invitation.Any offer or invitation to subscribe for shares or debentures by providing placement documents to 50 or more persons (including QIBs) would not be a QIP placement under Chapter XIIIA of the SEBI (DIP) Guidelines as it would be regarded as offer to public in terms of proviso to section 67(3) of the Companies Act.
5.0 This position is based on the representation made to the division in your aforesaid letters under reference. Different facts or condition might require different results. This letter does not express a decision of the Board on the question referred.
6.0 Please note that this position is only with respect to the applicability of the provisions of clause 13.A.7.3 and 13.A.7.4 of SEBI (DIP) Guidelines on “Qualified Institutions’ Placement”. It does not affect the applicability of any Act, Rules or Regulations, Guidelines and Circulars administered by SEBI or any other authority or the provision of the rules, regulations and bye laws or Listing Agreeement of the stock exchange.
Yours faithfully,
Neelam Bhardwaj