The qualified institutional placement (QIP) route for raising funds has lost its attraction.
In fiscal year 2017, until February, 19 companies garnered funds to the tune of Rs8,337 crore via QIPs, shows data from primary market tracker Prime Database.
QIP is an instrument through which listed companies can raise capital by issuing equity shares, fully and partly convertible debentures, or any securities other than convertible warrants, to a qualified institutional buyer. Despite it being a faster and time-saving option, as the chart shows, money raised through QIPs has declined significantly from the peak seen in 2009-10. Money raised using this tool in FY17 so far is the lowest since 2012-13.
Why the slowdown in raising funds through the QIP route?
Foreign institutional investors’ participation in FY17 has been subdued and it is only recently that they have started to make a comeback. Ambiguity about the impact of demonetization led to volatility in the stock market, which kept companies away from raising funds via QIPs, fearing that they might not find enough takers, said some market analysts.
Despite this, 24 companies have raised more than Rs25,000 crore via initial public offerings (IPOs) in FY17 so far. “If we draw a comparison between funds raised through QIPs and IPOs, then one would find that while on an overall basis money raised through IPOs has been large, not much of it is fresh capital for expansion; most companies have done IPOs as an offer for sale (OFS), giving existing shareholders a route to dilute their holdings," said Pranav Haldea, managing director at Prime Database.
Also, there is still excess capacity in the system and a substantial revival in demand is yet to happen, hence it should be noted that a couple of companies that raised funds via QIPs in this fiscal year did so largely with the aim of reducing debt. The latest one is Reliance Infrastructure Ltd; it is looking to raise Rs2,000 crore that would partly be used for debt reduction.
More companies tend to opt for QIPs in a bull market, hoping to find many buyers. Though the Indian stock market is currently rallying, valuations appear rich given that corporate earnings haven’t been impressive. In such a scenario, it would be difficult to find investors willing to bet on those listed companies scouting for funds to repay debt.