When businesses want to expand, they need capital. The stock market serves as an important medium for raising capital by sharing ownership of business in return for capital. Once the company gets listed on the stock exchange there are numerous ways to raise additional capital:

  • It could do a rights issue and offer more shares for a certain price to its existing shareholders.
  • The company could also do a Follow on Public Offer or an FPO which brings in more new shareholders by allotting fresh shares to them (think of it as an IPO part 2).
  • Preferential allotments to a select group of entities or investors like promoters etc, subject of course to a shareholder approval.
  • By doing a Qualified Institutional Placement

Qualified Institutional Placement (QIP) – Meaning

In a qualified institutional placement, money is raised by issuing securities such as equity shares by the issuing company only to QIBs – Qualified Institutional Buyers. Naturally then the company doing a QIP must already have its shares listed on a stock exchange.

Who Qualifies as a Qualified Institutional Buyer (QIBs)

An expression which answers this question in the most appropriate manner – Qualified Institutional Buyers (QIBs) are those investors who can “fend for themselves” and do not need the protection provided by the regulator, (i.e. SEBI). SEBI is meant for the protection of small retail investors who do not have the benefit of a large team of analysts working and doing due diligence for them. SEBI does not interfere in sale of securities made to large institutional investors given that they are unlikely to be misled into buying non-investment grade securities. The type of investors who qualify as QIBs:

a)     Public financial institutions;

b)     Scheduled commercial banks;

c)      Mutual Funds;

d)     Foreign institutional investor registered with SEBI;

e)     Multilateral and bilateral development financial institutions;

f)       Venture Capital funds registered with SEBI.

g)     Foreign Venture Capital investors registered with SEBI.

h)     State Industrial Development Corporations.

i)       Insurance Companies registered with the Insurance Regulatory and Development Authority (IRDA).

j)       Provident Funds (with minimum corpus of Rs.25 Cr.)

k)     Pension Funds (with minimum corpus of Rs. 25 Cr.)

Advantages of doing a QIP

SEBI introduced the QIP method of raising money in 2006 at a time when Indian companies were looking at investments from overseas to expand their operations, primarily because of easy availability of money in those jurisdictions and due to easy regulatory environment compared to India.

Main advantages of raising money via the QIB route:

Advantages for the issuing company:

  1. Speed: The regulatory oversight of SEBi is far more relaxed when money is raised via the QIP route. There is no long wait for document approval by a SEBI dealing officer as is the case when a company does an IPO, FPO or rights issue. The whole process can complete in 4-5 days, provided of course that the issuer company manages to get willing QIBs buyers.
  1. Cost efficiency: IPO/ Rights / FPO are an expensive affair. A large team of bankers, auditors, lawyers have to be involved and the approval could take 4-5 months if not more. Further, the fees to be paid to the exchange are far lesser in case of a QIP.

Advantages for the QIBs:

  1. Ability to buy large stakes: Let’s say a large institution/ investor is convinced about the long term business fundamentals of a business and would like to partner in the business by becoming a part stakeholder. Further, the investor wants to hold a larger stake (think 10-15%).In such a scenario issuing new shares by increasing capital is the only pragmatic way to bring in a new investor for 2 reasons:
  • If the investor tries to buy from secondary / open market, it will create a lot of volatility in the price of the listed share which will lead to expensive valuations and distort the very value at which the investor was willing to acquire the stake i.e. it will make the purchase price unattractive for the large investor.
  • If the company’s long term fundamentals are genuinely attractive, it will be hard to find sellers, especially at the price at which the new investor would like to acquire the stake.

2.     No Lock-In: Unlike investing in an IPO where accredited investors (or QIB buyers) must hold on to their shares for a certain period of time (typically 1 year), a Qualified Institutional Placement allows the investor to exit/ sell the stock at any point of time post its listing on the exchange.

Determining the pricing: How is a QIP Priced?

It would create volatility in price if the new shares under the QIP route were allotted to the QIBs based on price on the day of allotment as it could be higher or lower depending upon the market sentiment prevailing at the time.

Accordingly, SEBI has devised a formula to determine the issue price under the QIP route. As per the ICDR Regulations, issue of securities via QIP route shall be made –

at a price not less than the average of the weekly high and low of the closing prices of the equity shares of the same class quoted on the stock exchange during the two weeks preceding the Relevant date”.

Relevant date – the date of the meeting in which the board of directors of the issuer (company) or the committee of directors duly authorized by the board of directors of the issuer (company) decides to open the proposed issue.

How much can companies raise via QIP

In a single financial year a company can raise not more than 5 times its net worth based on the audited financial statements of the previous financial year.

What do you need as a company to do a QIP?

I.               A shareholder resolution authorizing the QIP issuance.

II.            Merchant Bankers – who will help the company prepare a placement document and file a due diligence certificate with the stock exchanges for listing of new shares. They also help the company conduct road shows to market the issue to QIB’s.

Past performance of QIP’s

While QIP is a quick and cheap way of raising money for issuers, a look back at some qualified institutional placements do not really highlight a great success story.

Below we looked at ALL the QIPs done between the periods 1 April 2010 to 31 March 2012. Keep in mind that the broader markets have risen by ~ 20% from the start of this period. A majority of the qualified institutional placements done during this time have performed extremely poorly.

Company QIP Price CMP Change
Kemrock Industries & Exports Ltd. 527.1 30.15 (94 %)
S.Kumars Nationwide Limited 80 6.11 (92 %)
Gss America Infotech Ltd. 326.06 38.05 (88 %)
Marg Ltd. 179.88 22.65 (87 %)
3i Infotech Ltd. 78.60 10.94 (86 %)
Manappuram General Finance & Leasing Ltd. 168.00 23.80 (86 %)
Kalpataru Power Transmission Limited 1,074.2 173.35 (84 %)
Gujarat NRE Coke Ltd. 88.20 15.51 (82 %)
Kiri Dyes and Chemicals Ltd. 597.55 119.05 (80 %)
C & C Constructions Ltd 243.8 50.30 (79 %)
Info Drive Software Ltd. 25.00 5.30 (79 %)
Parsvnath Developers Limited 141.57 36.55 (74 %)
Money Matters Financial Services Ltd. 625.25 174.5 (72 %)
Dhanalakshmi Bank Ltd. 181.3 56.30 (69 %)
Magma Fincorp Limited 301.00 106.30 (65 %)
Sanwaria Agro Oils Ltd. 26.95 10.18 (62 %)
Financial Eyes (India) Limited 50.00 18.95 (62 %)
Housing Development and Infrastructure Limited 271.40 109.70 (60 %)
Phillips Carbon Black Ltd. 200.00 83.80 (58 %)
Tata Motors Ltd. 1,074 452.3 (58 %)
Mahindra & Mahindra Financial Services Limited 695.00 296.2 (57 %)
Ansal Properties & Infrastructure Ltd. 89.95 40.00 (56 %)
Godrej Properties Ltd (IPP) 575.00 258.60 (55 %)
Usher Agro Ltd. 92.62 42.45 (54 %)
Elder Pharmaceuticals Ltd. 415.00 221.55 (47 %)
Diamond Power Infrastructure Limited 203.80 115.80 (43 %)
Sumeet Industries Ltd. 30.25 18.05 (40 %)
GMR Infrastructure Ltd. 62.20 37.75 (39 %)
Veer Energy & Infrastructure Ltd. 10.00 6.13 (39 %)
Prime Focus Ltd. 68.58 42.60 (38 %)
Lancor Holdings Ltd. 103.80 64.75 (38 %)
Tilaknagar Industries Ltd. 95.00 59.90 (37 %)
Shoppers Stop Ltd. 649.00 425.80 (34 %)
Jyothy Laboratories Ltd. 282.62 194.4 (31 %)
Pratibha Industries Ltd. 82.00 58.95 (28%)
Canara Bank 604.00 481.45 (20 %)
Infrastructure Development Finance Company Ltd. 168.25 135.65 (19 %)
JBF Industries Limited 157.15 128.65 (18 %)
Excel Infoways Limited 25.25 22.00 (13 %)
Adani Enterprises Ltd. 536.15 495.6 (8 %)
Allcargo Global Logistics Ltd. 184.8 207.55 12 %
Nilkamal Ltd. 280.35 327.65 17 %
ESS DEE Aluminium Ltd. 517.03 615.90 19 %
Aksh Optifibre Ltd. 19.50 23.30 19 %
Trent Ltd. 940.00 1,182.50 26 %
Strides Arcolab Ltd. 423.55 613.85 45 %
Vardhman Textiles Ltd. 340.00 493.05 45 %
Dewan Housing Finance Corporation Limited 255.50 371.80 46 %
Development Credit Bank Ltd. 47.84 73.35 53 %
Welspun India Ltd. 100.00 166.35 66 %
Dewan Housing Finance Corporation Ltd. 222.30 371.80 67 %
HSIL Limited 136.10 248.55 83 %
Ing Vysya Bank Ltd. 342.09 636.75 86 %
Apollo Hospitals Enterprise Ltd. 495.00 1,019.65 106 %
Bharat Forge Limited 272.00 562.80 107 %
Indusind Bank Ltd. 234.55 558.30 138 %
Godrej Consumer Products Ltd. 345.00 857.10 148 %
Natco Pharma Limited 225.00 790.35 251%
Edserv Softsystems Ltd. 205.00 Not traded in BSE/NSE
Indiabulls Financial Services Ltd. 137.90 Not traded in BSE/NSE

If you want to discuss your company’s capital raising plans or the contents of this article, please write in to me at – rajat@sanasecurities.com or call us at 011 – 41517078.