Price premium of private placement: evidence from India

Abstract

PurposeThis study identifies the factors responsible for obtaining price premium on privately placed equity in a developing market.Design/methodology/approachWe examine a unique data set of a special case of private placement of equity, Qualified Institutional Placement (QIP) in India purchased at a premium. The study analyzed 188 equity issues offered between September 2006 and December 2014. On average, we find that QIP issues received a price premium of 4.38%. The study employed binary probit and ordinary least square regression models to analyze the probability and magnitude of the premium.FindingsThe study attributes the price premium of QIP to certification effect through group affiliation, signaling through promoters' ownership and monitoring effect through existing institutional investors. These factors influence the probability of premium for QIP issues. However, group affiliation and institutional ownership do not significantly influence the magnitude of the premium.Originality/valueThe private placement of equity is usually offered at a discount. Our findings contribute to the existing literature by evaluating the premium obtained on private placement as a unique scenario in emerging market supported through certification hypothesis, monitoring hypothesis and signaling.

Private Placement of China-Listed Real Estate Firms: A Conceptual Idea

“…On the other hand, there are few markets sold at a premium. Tan et al (2002) corroborated a significant 13.73% premium for a private placement in Singapore, whereas an average 4.37% premium was reported in India (Katti et al 2020). In New Zealand, the pricing of placement is mixed, in which 27% of the sample is placed at an average premium of 4.7%, in contrast to 73% of the sample that is placed at an average discount of 10.2% (Anderson et al 2006).…”

“…Wu 2004). Katti et al (2020) found larger issues are positively associated with firm size, which has a lower level of information asymmetry. The low negotiation costs of the private placement, combined with management's decision to avoid a public offering, indicate the market management's perception that the company is undervalued (Happ and Schiereck 2017).…”

“…The average size of a private placement was about USD 75.94 million. Katti et al (2020) East Asian (Japan and Korea) Private placement arrangements were more common among group companies, and they accounted for a smaller share of new equity issuance compared to rights issues. Kato and Schallheim (1993); Baek et al (2006)…”

“…Under the SGX's (Singapore Exchange Limited) continuous listing guidelines, only rights offerings and private placements are to be made in Singapore, where public offerings are not permitted (Tan et al 2002). Katti et al (2020) stated that, in India, shares are exclusively sold to qualified institutional investors (QII) and promoters are not permitted to participate in the sale. The offer's floor price is determined by the regulator, and QII investment in private placements is not subject to a lock-in term in India.…”

“…Anglin et al (2011) found that enhancing financial incentives for board members minimizes knowledge asymmetry. In Indian firms, CEO duality drives the private placement premium, while board size has no impact (Katti et al 2020). Li et al (2011) observed an adverse relationship between managers' age and tenure and investment scale in state-owned firms, contrasting with the finding of Jiang and Dai (2009), where there is a positive correlation between manager age and corporate performance.…”