Home / Opinion / Online-views /  No takers for QIPs in a falling market, say investment bankers

Mumbai: A fund-raising window has shut for Indian companies after the stock market tumble this year.

Investment bankers say there are no takers for the so-called qualified institutional placements, or QIPs, which raised $3.2 billion (around Rs13,037 crore) in 2007.

A QIP is the private placement of shares or securities convertible into stock by a listed company to qualified institutional buyers such as banks, insurance firms, mutual funds and foreign institutional investors. According to market regulator Securities and Exchange Board of India (Sebi) fund raising through QIPs leapt 146% last year from $1.3 billion in 2006, almost double the annual growth posted by other cash-raising avenues such as sale of depository receipts and convertible bonds.

But, in a falling market, the formula set by Sebi on the pricing of a QIP issue has become a key hindrance, bankers said. According guidelines, the price of shares sold through QIPs should be either the average of the past six months’ trading price or the average during the previous two weeks—whichever is higher.

Because stock valuations have declined sharply, QIPs can only be priced at a premium to the current stock price by following this formula. Selling shares at such prices is an impossible proposition, given that many institutional investors are not keen to buy Indian stocks even at their current price, bankers said.

The price of most mid and large stocks in India have fallen far more than the Bombay Stock Exchange benchmark index, the Sensex, which has lost some 32% since January.

Mint spoke to executives at eight investment banks. All of them said QIPs as a fund-raising instrument had become irrelevant in the present context. The executives did not want to be identified because the issue involves the regulator. “The pricing formula for QIPs does not match the market reality of many stocks," said a senior investment banker with a foreign investment bank.

“In other countries such as the US, pricing of QIP issues are left to the market," said the head of investment banking at a US-based brokerage firm.

Proxy for public floats

Firms have been using QIPs as a proxy for public share sales. These placements are open exclusively to institutions that manage a large pool of securities, as against a public float, where investors belong to multiple classes. Sebi’s pricing mechanism is designed to protect minority shareholders by preventing companies from offering shares at a discount.

According to a senior executive at a domestic bank in Mumbai, the QIP advisory divisions at investment banks are shut because there has been no business since March.

QIPs were introduced by Sebi in mid-2006 and it soon emerged as a fund-raising option for publicly traded Indian firms over convertible bond issues and overseas listings.

Bloomberg’s league tables for Indian investment banks for the first half this year show there were seven QIP deals, with Kotak Mahindra Capital Co. Ltd, Royal Bank of Scotland (India) and Motilal Oswal Investment Advisors leading the ranks, based on volume.

All the sales took place in the first quarter of this calendar year, bankers said. Bank of India and Sintex Industries Ltd were among those raised funds through QIPs in early 2008.

A $1.5 billion QIP by the country’s second largest property developer, Unitech Ltd, which was advised by CLSA Asia Pacific and Credit Suisse Securities (India) Pvt. Ltd, had to be pulled during the first quarter as markets weakened.

Textile firm Spentex Industries Ltd was the first company to tap the QIP route after the concept was introduced.

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