Minimum 25% Public float and the QIP Block
Given the volatility of the global market since 2008, the Indian finance minister proposed to raise the threshold for non-promoter, public shareholdings for all listed companies in his budget speech for 2009-2010. On June 4 2010 the same was implemented by means of the Securities Contracts (Regulation) (Amendment) Rules 2010, which were notified through a Ministry of Finance press release. On August 9 2010 the Ministry of Finance further amended these rules by enacting the Securities Contracts (Regulation) (Second Amendment) Rules 2010.
The rationale for increasing the minimum public float is that the larger the number of shareholders, the less there scope for price manipulation.
Given the above, many Companies are in a flurry to divest promoter shareholding or are issuing new shares to meet the minimum public float of 25% requirement prescribed by the finance Ministry. This blog addresses the specific use of Qualified Institutional placements (“QIP”) for divestment of a company’s stake to the public in order to comply with the minimum 25% public float. For the above compliance the QIP route under chapter VIII of SEBI’s (Issue of Capital and Disclosure Requirements) Regulations, 2009 (“ICDR Regulations”) cannot be used to achieve the minimum public float requirement.
Though Qualified Institutional buyers (“QIB”) are public shareholders, It is the nature of offer that determines whether the offer is a public offer or a private placement. Even though QIBs are public, the offer made to them via a QIP is private; Moreover, in terms of sec 67(3), the offer itself cannot be made to more than 49 entities.
Although, the definition of public shareholding in the Listing Agreement includes all shareholding except depository receipts and the same is mirrored in the Securities Contracts Regulation Rules, 1957, i.e.“’Public shareholding’ means equity shares of the company held by public and shall exclude shares which are held by custodian against depository receipts issued overseas.” And consequent to these definitions shareholding by all QIBs comprises of public shareholding, any offering of shares to a QIP via a QIP is construed as a private placement as it is a selective offer. Further, clause 40A sub clause ii(a) of the Listing Agreement provides for “issuance of shares to the public through a prospectus,” as one of the three means of achieving minimum public shareholding.
Further, QIPs are also not allowed to achieve compliance with respect to Clause 40A, not only since it is not a mode specified by SEBI to achieve compliance, but also because:
• The draft placement document for issue of specified securities to QIBs is required to have the following disclaimer in accordance with Chapter VIII of the ICDR Regulations, which says:
“The placement is meant only for QIBs on a private placement basis and is not an offer to the public or to any other class of investors.” (the same disclaimer is mandated in the Memorandum to be issued to QIBs by Schedule XVIII of the ICDR Regulations.)
• Chapter VIII of SEBI (ICDR) does not permit a non-compliant company to make a QIP and Companies that were allowed to be listed with a 10% public shareholding either by virtue of their IPO at that percentage or the market cap and number of shares criteria, became non-compliant w.e.f. June 4, 2010 pursuant to amendment to rule 19(2)(b) of Securities Contracts (Regulation) Rules, 1957, though such companies have been allowed a time of 3 years to achieve compliance.
• Further in the confirmation which has to be submitted by the Issuer Company to the General Manager, Dept. of Corporate Services, BSE Ltd., (the Issuer Company is required to confirm, inter-alia, that it complies with the prescribed requirement of minimum public shareholding as required in Clause 40A of the Listing Agreement as part of the pre-QIP issue checklist (the same confirmation is mirrored in Clause 82 (c) of the SEBI, ICDR Regulations).
Though there is no bar to increasing public shareholding by a public issue where QIBs comprise a part of the net offer to the public, however using a qualified institutional placement alone and making an offer to a handful of qualified institutional buyers will not meet the requirements of Listing Agreement Clause 40A and consequently companies will not be able to meet the 25% minimum public float requirement by using the QIP route.
