QIB In IPO Explained: Eligibility, Importance & Allocation Rules

You are waiting to get entry to the venue of your favourite concert. Meanwhile, besides you, there are entry gates through which you see VVIPs zoom past you. Not just that, a few rows in the front of the concert are also booked exclusively for them. A common sight we often come across.

Come to initial public offerings (IPOs), and there is an elite category of investors for whom the maximum number of shares is reserved. These investors are known as qualified institutional buyers, or QIBs. Large specialised investors, crucial for an IPO’s success, lend credibility to an IPO. Read on to know what is QIB in IPOs, their role, and their importance.

What Is QIB In IPO?

QIBs are large institutional investors. These include insurance companies, asset management companies, banks, venture capital investors, alternative investment funds, and foreign portfolio investors. They possess greater expertise and knowledge to participate in IPOs and other capital market activities.

Financially strong, QIB participation lends stability and trust to an IPO. Because of this, their share allotment is higher than that of other investor categories, such as retail.

Eligibility Criteria For QIBs

Now that you know the full form of QIB in IPO, let us understand their eligibility criteria. Not everyone can be in this category. As per SEBI, the following entities qualify as QIBs:

• Mutual fund, alternative investment fund, venture capital fund and foreign venture capital investors registered with SEBI.
• Scheduled commercial bank.
• IRDAI-registered insurance company.
• A state industrial development corporation.
• Public financial institution.
• Provident fund with a minimum corpus of ₹25 crores.
• Pension fund with a minimum corpus of ₹25 crores.
• National Investment Fund.
• Insurance funds that are set up and managed by the army, navy or air force.
• Insurance funds that are set up and managed by the Department of Posts, India.

Compared to other types of investors, QIBs usually have more money and more experience in capital markets.

Why Are QIBs Important In IPOs?

There are several reasons why QIBs are important for an IPO. Some of them are:

• Trust and Credibility

Well-known institutions participating in an IPO send a positive signal. Retail investors feel confident. They feel that if experts are willing to invest, the company fundamentals must be sound.

• Stability

QIBs invest large amounts of money in an IPO. This ensures the IPO gets enough subscriptions. This, in turn, makes the issue more stable and enhances the chances of success. In other words, their strong participation reduces the risk of failure.

• Improved Market Sentiment

A high QIB subscription creates positive market buzz. This can attract more retail and non-institutional investors. Often, a strong QIB subscription leads to oversubscription. This increases the IPO's popularity.

• Help Keep Stock Prices Stable

QIBs are generally long-term investors. They usually do not sell shares immediately after purchase. This helps keep share prices stable post listing.

Allocation Rules & How Much Is Reserved For QIBs?

Allocation rules for QIBs in an IPO are fixed by the capital market regulator. Given below is a detailed breakdown:

Minimum and Typical Allocation Percentages

In the book building process, there are two regulations for QIB allocation. Under Regulation 6(1), QIBs are allocated 50% of the shares. Under Regulation 6(2), 75% of the shares are reserved for them.

Also,

• 5% of the QIB quota is reserved for mutual funds.
• Not more than 60% of the QIB category is allocated to anchor investors.

Recently, SEBI has floated a consultation paper, whereby it has proposed to increase the QIB quota for large IPOs (issue size exceeding ₹5000 crores) from 50% to 60%.

What Happens If QIB Quota Is Not Filled?

If the QIB quota does not get filled, it signals low confidence among institutional investors. If the quota is not filled, the issuer can allocate the shares to other investor categories. It may also adjust the size of the offer. In the worst-case scenario, the IPO may be withdrawn.

Role Of Anchor Investors In QIB Portion

Anchor investors, a subset of QIBs, help set the tone for an issue. Think of them as the host and support staff of a concert who try to settle things before the actual show. As anchor investors subscribe a day before the IPO, their strong participation increases investor confidence.

Advantages And Limitations Of QIB Participation

While participation by QIBs brings stability to an IPO and other advantages, there are certain limitations as well. Some of the benefits and limitations associated with QIB participation are as follows:

Large Capital

QIBs can invest large amounts of money. This ensures that a significant portion of the IPO gets subscribed quickly. This provides the company with financial stability.

Credibility For Issuer

When well-known organisations put money into an IPO, it makes the company look more trustworthy. This makes investors feel more sure.

Professional Evaluation Reducing Risk

QIBs conduct deep research and due diligence. Their assessment adds trust to the issue. It also goes a long way in validating the company’s fundamentals.

Better Pricing Signals

QIB participation helps the company and the bankers determine accurate IPO pricing. An IPO that is priced correctly lowers the risk of overvaluation.

Possible Dilution Of Control For Issuers

When QIBs buy big stakes, the company’s promoters may experience dilution of ownership. Institutions may expect more transparency and control.

Less Favourable Terms For Smaller Investors

A large allocation to QIBs may reduce the chances of allotment to smaller investors. It can lead to greater competition among other categories of investors. As a result, some retail investors may not receive any allotment.

Risk Of Institutional Sell‑Offs

Unlike other categories of investors, there is no lock-in for QIBs. This means they can sell their shares right after they go public. Many QIBs invest with a long-term goal in mind. However, some may leave early, which can cause prices to drop quickly and make retail investors panic.

Key Takeaway For Investors And Issuers

Strong interest from QIBs is a good sign for the company that is issuing the IPO and shows that institutions have faith in it. However, investors should not only look at QIB interest when deciding whether or not to invest in an IPO. Before you invest, you should look over the company’s basics, finances, strengths, and risks. All vital details can be found in the company’s red herring prospectus.

Conclusion

QIBs in IPOs play a vital role in shaping the overall success of the public offering. They bring deep market expertise. This helps evaluate the company’s fundamentals and support fair price discovery. Their participation also adds liquidity, which makes sure that a large part of the IPO is quickly and easily subscribed to.

Sources:

NSE
BSE India
SEBI
Fortune India