QIPs, What I know of it!

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.