Past few months we have seen many
companies like reliance communications, Idea, GMR infrastructure & JP
associates raising funds through QIPs and now Adani enterprises is on the same
line. So what do we understand by QIP? Why are they used by companies? We will
also try to understand the pros and cons of it with few market examples of QIPs which have succeeded or failed in the past.
QIP stands for Qualified
Institutional Placement. Before introduction of QIPs companies were making use
of ADRs and GDRs to rise funds from international source and this bothered the
economy and that’s why SEBI introduced QIP norms in 2006 with regulations and
flexibility which would help mobilization of domestic capital. A company can
issue equity shares, fully and partly convertible debentures, or any securities
other than warrants which are convertible to equity shares to a Qualified Institutional Buyer (QIB). 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 persons.
QIPs are used by companies because
of mainly 2 advantages i.e. speed with which they can raise funds due to less
regulations and document work which is to be done if it is an IPO and second factor
being cost. If it is an IPO or rights issue, or FPO, the cost of rising funds
is more because of appointment of lawyers, auditors, lead bankers, underwriters
etc. whereas here such procedures are not needed. They are priced based on the average
2 weeks high & low price of the security. And this issue can only be made
to QIBs i.e. Qualified Institutional Buyers are institutional investors who
don’t need protection from SEBI in performing due diligence activity that will
be undertaken by SEBI in the form of documents that it asks the companies to submit before offering an IPO. They are
capable of conducting their own due diligence before investing such a hefty
amount of money and they take their position cautiously after all calculations.
Main advantage for QIBs in this investment
is if they are convinced with the fundamentals of the company, they can get
large chunk of share in in the company and it is advantageous buying through
QIP route than market route because large buy in market would distort the price
at which it is being traded due to volatility. And sellers can sell or exit their
position any time they feel like unlike lock in period in certain type of investment.
Coming to fears about QIP, companies that raise funds through QIP should be
cautious as there is no lock in period for the buyers to stay in and it also
leads to dilution of ownership rights as QIPs enable QIBs get majority stake in
companies.
There have been few very
successful investments via QIP routes which have increased enormously in value like
Godreg Consumeer Products which has increased by 161% from 345 per share to 903
per share now and Apollo Hospitals which has increased by 134% from a share
price of 495 to 1159. There have also been few disastrous choice made by QIBs which
have crumbled in their share prices like 3i Infotech whose share price has
fallen by 88% from 78.6/- per share to 8.86/- per share now and Dhanalaxmi Bank
whose value has fallen by 74% from 181.3 to 46.8 per share.
Again coming to the ground reality
this is just a game of money where one person uses QIP as source of fund and another
person invests or lends on the basis of his strategic analysis of the company where he invests. Success depends on various factors one of them being the borrower himself because success factor depends on how well he strategises his investment to create value.
