Introduction
A company may issue financial securities, such as shares and convertible securities, to a group of few investors. This distribution strategy is known as a private placement.
Understanding Private Placement
There are two kinds of private placement—preferential allotment and qualified institutional placement. A listed company can issue securities to a select group of entities, such as institutions or promoters, at a particular price. This scenario is known as a preferential allotment.
The eligibility of investors, in this case, is specified in Chapter XIII of SEBI (DIP) guidelines. Investors may have a lock-in period.
A company must take permission from its shareholders to carry on with preferential allotment. Recently, the SEBI eased this norm of preferential allotment to help revive Satyam Computers.
Under qualified institutional placement, a listed company issues shares or convertibles to institutional buyers only. This norm is followed as per the provisions in Chapter XIIIA of SEBI (DIP) guidelines. The process encourages listed companies to raise funds from the domestic market rather than going to foreign markets.
