What is Private Placement?

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What is Private Placement? Blog Image


Sebi recently decided to repeal certain circulars that provided relaxation in cases involving the allotment of securities through a private placement route.

About Private Placement

  • A private placement is the sale of stock shares or bonds to pre-selected investors and institutions rather than publicly on the open market.
  • Investors invited to participate in private placement programs include wealthy individual investors, banks and other financial institutions, mutual funds, insurance companies, and pension funds.
  • One advantage of a private placement is its relatively few regulatory requirements.
  • By opting for private placements, companies can maintain closer relations with investors, negotiate flexible terms, and potentially retain greater control over the company’s direction and growth strategies.
  • There are two kinds of private placement: preferential allotment and qualified institutional placement.
  • Preferential allotment:
    • It is a method of private placement where a company issues new shares to a select group of existing shareholders or to a specific group of investors, often at a price lower than the prevailing market price.
    • Purpose: This method is especially common when the company wants to reward or retain existing shareholders, such as promoters, by offering them the opportunity to purchase additional shares.
    • SEBI regulations and the Companies Act govern preferential allotment in India. 
    • A company must take permission from its shareholders to carry on with preferential allotment.
  • Qualified Institutional Placement (QIP):
    • QIP is a private placement exclusively available to listed companies.
    • Under QIP, a listed company can issue shares or other securities to qualified institutional buyers (QIBs), such as mutual funds, banks, insurance companies, and foreign institutional investors, without making a public offering.
    • Purpose: Companies use QIP to raise capital from institutional investors quickly and efficiently. Companies choose this option when they require funds for expansion, reducing debt, or other corporate purposes.
    • SEBI has established guidelines for QIP issuances in India.

Q1) What are Bonds?

A bond is a fixed-income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental) for a set period of time in return for regular interest payments. The time from when the bond is issued to when the borrower has agreed to pay the loan back is called its ‘term to maturity’. The bond issuer uses the money raised from bonds to undertake various activities, such as funding expansion projects, refinancing existing debt, undertaking welfare activities, etc. 

Source: Sebi decides to repeal certain circulars related to private placement of securities