It is a capital raising tool wherein a listed company can issue any security (other than warrants)
It is a story that is true in every bull run—everyone wants a piece of it. During the bull run in 2007-08, there was a slew of initial public offerings (IPOs) and new fund offerings. This time, too, when the Sensex is trading around its all-time high of 25,000, there are a string of companies ready to use this window of opportunity to raise money through the qualified institutional placement (QIP) route. Many are slated to announce their issuances soon. According to data with Prime Database, a primary market tracker, in 2014 till May, four companies have raised money, a total of 11,454 crore, through QIPs. In all of 2013, 10 companies had raised 8,075 crore, and 12 companies (4,704 crore) in 2012.
What is a QIP?
A QIP is a capital raising tool wherein a listed company can issue equity shares, fully and partly convertible debentures, or any security (other than warrants) that is convertible to equity shares. Apart from preferential allotment, this is the only other speedy method of private placement whereby a listed company can issue shares or convertible securities to a select group of investors. But unlike in an IPO or an FPO (further public offer), only institutions or qualified institutional buyers (QIBs) can participate in a QIP issuance. QIBs include mutual funds, domestic financial institutions such as banks and insurance companies, venture capital funds, foreign institutional investors, and others.
There are a few rules to follow. The market regulator has stated that there should be at least two QIBs if the issue size is less than 250 crore, and at least five investors if the size is more than 250 crore. A single investor cannot be allotted more than 50% of the issue.
How is the price decided?
The QIP will be priced not less than the average of the weekly high and low of the closing prices of the equity shares during the two weeks preceding the “relevant" date. The “relevant" date will be the opening date of the issue, as decided by the company’s board. In a rising market, such as now, the QIP price is set at an attractive rate.
For the issuing company, QIPs are less cumbersome than IPOs and FPOs. It doesn’t have to file a pre-issue document with the capital markets regulator, and only a placement document with the stock exchanges, which only has details of the issue.
QIP is also a less expensive mode of raising capital than, say, an IPO, FPO or rights issue.
For the QIBs, unlike in an IPO where an anchor investor has to stay invested for a month, there are no such restrictions with QIPs.
With the new government, the sentiment towards our economy has changed. The revival has opened a welcome window for companies that have been struggling to raise funds, which is why companies are lining up to raise money.