Private Placement norms for issuance to QIBs made easier

- “Umbrella” special resolution to be sufficient for a year

- By Megha Saraf
- Manager | Corporate Law Division
megha@vinodkothari.com

Private Placement of securities is one of the most frequently used means for raising funds by
companies. Section 42 of the Companies Act, 2013 (“Act, 2013”) read with Companies
(Prospectus and Allotment of Securities) Rules, 2014 (“PAS Rules”) deals with the procedural
norms for private placement. Further, depending upon the nature of security i.e. shares or
debentures, the provisions of Section 62(1) (c) or Section 71 of the Act, 2013, as the case may
be, is applicable.

Private placement refers to the issuance of securities made to a select group of individuals
not exceeding 200 in number which excludes the securities offered to Qualified Institutional
Buyers (QIBs) and employees of the company who are issued securities under a scheme of
ESOP.

Issuance of securities under private placement requires prior approval of shareholders by

way of passing a Special Resolution (SR) for each invitation except in case of issue of non-
convertible debentures (NCDs) In case of issue of NCDs, the SR passed u/s 180 (1) (c) will be
adequate provided the proposed issuance is within the ceiling limits. MCA vide its
Notification1 dated 16th October, 2020 has provided an exception to companies making an
issuance of securities to QIBs by passing a blanket special resolution which shall be valid for
a year. The said amendment is effective from the date of the Notification.

The Article briefly captures the earlier and the revised norms and the probable impact of the
same.

Who are QIBs?

As per the SEBI Report2, primary market investors can broadly be categorized into three
categories:
i. Retail individual Investor (RIIs)
ii. Non‐Institutional Investors (NIIs)
iii. Qualified Institutional Buyers (QIBs)

QIBs under Section 42 of the Act, 2013 is referred to mean such buyers as defined under the
SEBI (Issue of Capital and Disclosures Requirements) Regulations, 2018 (“ICDR
Regulations”). Regulation 2(1)(ss) of the ICDR Regulations define QIBs to mean the
following:

1
http://egazette.nic.in/WriteReadData/2020/222511.pdf
2
https://www.sebi.gov.in/sebi_data/commondocs/subsection1_p.pdf
 (i) “a mutual fund, venture capital fund, alternative investment fund and foreign
venture capital investor registered with the Board;
(ii) foreign portfolio investor other than individuals, corporate bodies and family
offices;
(iii) a public financial institution;
(iv) a scheduled commercial bank;
(v) a multilateral and bilateral development financial institution;
(vi) a state industrial development corporation;
(vii) an insurance company registered with the Insurance Regulatory and Development
Authority of India;
(viii) a provident fund with minimum corpus of twenty five crore rupees;
(ix) a pension fund with minimum corpus of twenty five crore rupees;
(x) National Investment Fund set up by resolution no. F. No. 2/3/2005-DDII dated
November 23, 2005 of the Government of India published in the Gazette of India;
(xi) insurance funds set up and managed by army, navy or air force of the Union
of India; and
(xii) insurance funds set up and managed by the Department of Posts, India; and
(xiii) systemically important non-banking financial companies.”

Existing approval mechanism for private placement

Presently, the procedural norms for seeking approvals for the purpose of private placement
are as follows:
•Board resolution under Section 179(3)(c)
•Delegation of power to a Committee or Board or Management for identification of the
BR investors and carrying out other ancillary activities in relation thereto.

•Filing of resolution for the aforesaid in e-Form MGT-14 as required under Section 117(3)(g).
MGT-14

•Seeking shareholders’ approval for the issuance of securities under Section 42

SR

•Filing of the aforesaid in e-Form MGT-14 under Section 117(3)(a).

MGT-14

•Filing of intimation for allotment of securities in e-form PAS-3

PAS-3
Existing carve-out- ‘Security specific’

The Company Law Committee (‘CLC’) Report3 issued on 1st February, 2016 clearly spelt out
the need for doing away with obtaining separate SR in case of issuance of NCDs. The intent
behind this change was to sink the borrowing approvals under section 42 with that of section
180 (1) (c) of the Act, 2013.

The existing carve out for NCDs is depicted below:

•Resolution already approved under Section

Within the limits 180(1)(c)
•Proposed issuance is within such limits
of 180(1)(c) •No fresh SR required
•BR shall suffice

•SR required for breaching the limits of 180(1)(c)

Beyond the limits •1 SR to suffice for all issuances of NCDs in a year
•Issuance of any other security shall require fresh
of 180(1)(c) SR each time

Amended carve-out- ‘Investor specific’

In addition to the existing carve-out for NCDs, MCA has now provided for a similar carve-out
where the offer of a security is made to QIBs. Companies offering any security to QIBs under
private placement mechanism may pass an ‘umbrella’ SR which shall be valid for a year.

Accordingly, in addition to the security specific carve-out, the MCA has now introduced the
‘Investor specific’ carve-out which is much wider as it will cover all kinds of securities offered
to QIBs under private placement.

‘Investor specific’ exception - need and impact

Private Placement to QIBs have seen a growth over the years. According to an article4 as per
PRIME Database, around 70 companies had announced their intention to raise fund through
private placement to QIBs upto Rs. 1.5 trillion in 2019. The said companies include State
Bank of India, ICICI Bank, Adani Power, JSW Steel etc. Participation of investors in these
private placements have been QIBs. In 2019, the second largest private placement to QIBs
was made by Axis Bank. These data are clear to show that QIBs are largely the participants

3
Click here to view the Report
4
Source credit: https://www.business-standard.com/article/markets/fund-mobilisation-via-qips-in-2019-is-the-
second-highest-in-five-years-119111200232_1.html
in the capital raising exercise by corporates. The MCA’s approach in making private
placement mechanism easier by bringing such ‘Investor specific’ exception may be said to be
much awaited.

Ambiguity of ‘Investor specific’ exception in case of NCDs

The second proviso to Rule 14(1) of the PAS Rules provides an exception that where NCDs
are proposed to be issued, there is no requirement to get a prior approval of the shareholders
by a special resolution, if the limits under Section 180(1)(c) are not exceeded. The next
proviso to the sub-rule says that where such limits are exceeded, it shall be sufficient if a
prior special resolution is passed for all NCDs issues once in a year.
Having said so, a question might arise that what if the NCDs proposed to be issued are offered
to QIBs? Will the same require a fresh approval of shareholders by way of special resolution
by virtue of the newly inserted exception? The answer to this question should be that if the
proposed issuance of NCDs are within the limits of Section 180(1)© (as extended by the
shareholders of the company by a special resolution), then there is no requirement to knock
the door of the shareholders again. It is to be understood that the limits of Section 180(1)©
are not absolute limits as it extends to the limits as granted by the shareholders. Accordingly,
where the shareholders themselves had granted an extended limit under Section 180(1)©,
that is to be treated as the limit of the Section itself i.e. the limits within which power to issue
and raise borrowings lies with the Board.
Had it been the situation, that this ‘Investor specific’ exception wouldn’t have come,
companies proposing to issue NCDs would still be required to check whether they are
already within the extended limits approved by the shareholders by virtue of the second
proviso or are they exceeding such limits by virtue of the third proviso without considering
the fact as to who is the investor in such case (newly inserted fourth proviso).

Conclusion

Although the ambiguity remains as explained above, however, it is be considered that QIBs are such
institutions or bodies which are large investors and are financial experts and are meant to invest in
capital markets as a part of their business operations. The sources of income for such institutions or
bodies largely comprises financial income i.e. interest or dividends from their investments. Also,
companies largely depend on these institutions or bodies for raising funds for carrying out their business
operations. Approaching the shareholders of the company each time for a special resolution before
raising funds was undoubtedly a compliance burden for them.

Additionally, it was also a costly exercise for companies with a large shareholder base to obtain
shareholder’s approval as that requires convening of an extra-ordinary general meeting or through
means of a postal ballot (in case where the need for fundraising is urgent and the company does not
have an upcoming annual general meeting). Hence, the amendment may be considered as a much
welcome change which will also be cost effective for all companies.

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