Private placement

A private placement is a sale of securities by a company to a select group of investors. The company sells the shares only to known persons, not more than 200, and not to the general public. Investors who are generally invited to participate in a private placement include HNIs, banks, mutual funds, insurance companies and pension funds.

It is often used when a company needs to raise capital quickly or involve strategic investors who can add value. The board of directors selects the people it wishes to sell the securities to. The company must prepare a private placement offer along with the application.

A private placement can be an alternative to an IPO for unlisted companies or a follow-on public offering for listed companies.

Types of Private Placement

There are two types of private placements: preferential allotment and qualified institutional placement.

1. Preferential allotment: In a preferential allotment, a company sells new securities to existing shareholders or selected groups of people. These investors are usually existing shareholders, promoters or strategic investors. The company sells the shares at a specified price. As per SEBI guidelines, the investors can observe a lock-in period.
2. Qualified institutional placement: In a qualified institutional placement, a listed company can raise capital by issuing securities to qualified institutional buyers (QIBs) without the need for a public offering. QIBs include mutual funds, insurance companies and pension funds.

This approach encourages companies to raise funding in domestic markets rather than international markets.