Private Investments in Public Equity (PIPE)

Market Sentiments

Markets have fallen down drastically; there is hue and cry for liquidity all over the world. The losses are deepening with incidents happening one after another. The terrorist attack in Mumbai is again a blow on the Indian economy. In a situation where big giants are crumbling down, one cannot guess the plight of small and midsized corporate. In this era of huge financial crunch, the right approach should be to devise and promote means of easy financing to keep the ball rolling and regain investor’s faith.

Small and midsized companies face significant hurdles in their efforts to raise money, especially during these crisis times. As per the scenario now, investors are reluctant to make direct investments in Corporate, with a fear of losing their hard earned money. At the same time it is becoming difficult for companies to survive, if not grow with the liquidity crunch.


PIPE is a mode of finance, which to some extent can ease the liquidity crunch in the industry. A quick brief on PIPE follows:

PIPE transaction involves allowing of private investment from investment firms, mutual funds and other qualified investors, usually at a discount to the current market value providing capital to the company. The investments may be in shares, stock or convertible security of the listed company. Once the deal is made, and the securities are issued, steps are initiated for listing the securities to the advantage of the investor.

Benefits of a PIPE deal

A PIPE deal saves a company from the complexity of selling shares through a fresh public issue. Instead, the company finds an investor and sells him a block of newly issued shares at an agreed price or a block of debt which can later be converted into shares (a structured PIPE).

Some of the benefits of PIPE deal over a fresh public issue of shares are as follows:

  • There is no fear of undersubscription, since it’s a certain deal between the investor and issuer.
  • Normally coming out with a fresh public issue involves a lot of compliance formalities, and engages a lot of time. However with PIPE the fund raising process is much faster;
  • Considering the cost of funding, even relatively small amounts of capital can be raised;
  • Pricing is certain once the deal has been negotiated (none of the uncertainty of a book build is associated);
  • Advantage over competitors, since the information of raising capital can be kept confidential;
  • Less equity dilution since the issue is made to private investors

Regulatory concerns

Whereas in countries like U.S., Australia, Canada, and the U.K. the regulations are accommodating for PIPE transactions, however in some countries compliance has to be made for norms exempting from rights issue before issuing shares to other than existing shareholder.

A PIPE transaction in India has to satisfy the conditions stipulated under SEBI guidelines for preferential issues. Further a revision of SEBI Insider Trading Regulations is required to incorporate strict norms for disallowing share trading by the investor or his advisor on basis of any unpublished price sensitive information discovered during the PIPE transactions.


PIPEs are increasingly becoming popular to finance growth, acquisitions and for working capital need of smaller firms. The PIPE transactions give access to capital at a lower cost than typical underwritten offerings, while simultaneously also increasing institutional investment in the company and improving the public float of securities.

Author: Neha Singhi
Contact: +91-33-40083385
Date: November 28 2008

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