In today’s world, businesses require a steady flow of capital to keep growing. One of the most popular financing methods for companies is through equity raising. Out of various equity-raising methods, Qualified Institutional Placement (QIP) is one of the most popular ones. In this article, we will deep dive into understanding QIP – What it is, how it works, its advantages, and disadvantages, etc.

What Is a Qualified Institutional Placement (QIP)?

Qualified Institutional Placement, commonly known as QIP, is an equity fundraising method used by companies to raise capital. As per the Securities and Exchange Board of India (SEBI), QIP is defined as “A process of selling securities, equity or otherwise, to Qualified Institutional Buyers (QIBs) by way of an issue or offer of securities.”

QIP is a popular method of fundraising among companies in India, as it allows them to raise capital quickly and efficiently. The process involves the issuance of securities to QIBs, who are institutional investors such as mutual funds, banks, and insurance companies.

One of the advantages of QIP is that it allows companies to raise capital without diluting the ownership of existing shareholders. This is because the securities are issued to QIBs, who are not considered part of the company’s existing shareholder base. Additionally, QIP is a cost-effective method of fundraising, as it does not involve the high fees associated with other methods such as initial public offerings (IPOs).

How Does a Qualified Institutional Placement (QIP) Work?

In a QIP, a company issues its securities, which could be equity shares, convertible preference shares, or any other security, to QIBs for raising funds. The securities issued are in the form of a public offer, but it is limited only to the QIBs. QIBs, in turn, invest in the securities and provide the company with the required funds.

The QIP process is a faster and more cost-effective way for companies to raise funds compared to traditional methods such as IPOs. This is because the company does not have to go through the lengthy process of filing a prospectus with the Securities and Exchange Board of India (SEBI) and waiting for regulatory approvals. Additionally, the company can save on underwriting fees and other expenses associated with an IPO. However, QIPs are subject to certain regulations and restrictions, such as a minimum issue size and a lock-in period for the shares issued.

Advantages of a Qualified Institutional Placement (QIP)

QIPs have several advantages for companies over other methods of fundraising:

• The cost of raising funds via a QIP is significantly lower than other equity fundraising methods.
• The time taken to complete the fundraising process in a QIP is relatively shorter than an IPO.
• The funds raised via a QIP do not come with any collateral obligation, keeping the balance sheet of the company intact.

Another advantage of a QIP is that it allows companies to raise funds from qualified institutional buyers, which can include banks, mutual funds, and insurance companies. These buyers are typically more stable and long-term investors, which can provide a sense of stability to the company’s shareholder base.

Additionally, a QIP can be a more flexible fundraising option for companies, as they can choose the timing and size of the offering based on market conditions and their own financial needs. This can provide more control and strategic planning for the company’s fundraising efforts.

Disadvantages of a Qualified Institutional Placement (QIP)

QIPs have several disadvantages for companies over other methods of fundraising:

• The share price may fluctuate depending on the demand and supply of shares in the stock market.
• QIPs require a large number of QIBs to subscribe to the offer, which may not be possible for smaller companies.

Another disadvantage of QIPs is that they can dilute the ownership of existing shareholders. When a company issues new shares through a QIP, the ownership percentage of existing shareholders decreases. This can lead to a loss of control for the existing shareholders, as they may no longer have a majority stake in the company.

Additionally, QIPs can be time-consuming and expensive for companies to execute. Companies must comply with various regulatory requirements and may need to hire investment banks and legal advisors to assist with the process. This can result in significant costs for the company, which may not be feasible for smaller companies with limited resources.

Eligibility Criteria for a Qualified Institutional Placement (QIP)

A company is eligible to raise funds via a QIP on fulfilling the following criteria:

• The company needs to be listed on a recognized stock exchange.
• The minimum issue size requirement is Rs. 100 crores.
• The QIP cannot exceed five times the company’s net worth.

Additionally, the company must have a positive net worth in the preceding three years and should not have been referred to the National Company Law Tribunal (NCLT) for insolvency proceedings. The company must also not have been debarred by the Securities and Exchange Board of India (SEBI) or any other regulatory authority.

Furthermore, the QIP can only be issued to qualified institutional buyers (QIBs) who are registered with SEBI. The QIBs must also have a minimum net worth of Rs. 100 crores or a minimum asset under management (AUM) of Rs. 500 crores.

Types of Investors Who Can Participate in a QIP

QIPs are limited to institutional investors, including mutual funds, banks, financial institutions, and foreign institutional investors, who are referred to as QIBs. Retail investors and high net worth individuals are not eligible to participate in QIPs.

One of the main reasons why QIPs are limited to institutional investors is that they are considered to be more sophisticated and have a better understanding of the risks involved in investing in the stock market. These investors also have access to a larger pool of capital, which makes it easier for companies to raise the funds they need.

Another advantage of QIPs is that they are a faster and more efficient way for companies to raise capital compared to traditional methods such as IPOs. This is because QIPs do not require companies to go through the lengthy and expensive process of preparing a prospectus and getting regulatory approval.

Comparison Between QIP and Other Fundraising Methods

QIPs are an alternative to Initial Public Offerings (IPOs) and are often compared with them. Compared to IPOs, QIPs are less time-consuming and have lower costs. Also, in QIPs, there is no obligation to release the company’s quarterly financials to the public, as is the case for listed companies. On the other hand, IPOs are more suitable for companies looking for wider retail and HNI investor participation.

Another fundraising method that is often compared to QIPs is private placements. Private placements are offerings of securities to a small group of accredited investors, such as institutional investors, high net worth individuals, and private equity firms. Unlike QIPs, private placements are not open to the public and are not regulated by the Securities and Exchange Board of India (SEBI). However, private placements can be more flexible in terms of pricing and structure, and can be completed more quickly than QIPs.

Regulatory Framework for QIPs in India

QIPs are governed by SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. Companies need to adhere to the rules and regulations laid down by SEBI to conduct a successful QIP.

SEBI has set certain eligibility criteria for companies to be able to conduct a QIP. The company must have a minimum net worth of Rs. 250 crore and a track record of profitability for at least three years. Additionally, the company must not have been referred to the National Company Law Tribunal (NCLT) for insolvency proceedings.

SEBI has also mandated that the pricing of shares in a QIP should not be lower than the average of the weekly high and low of the closing prices of the shares on the stock exchange during the two weeks preceding the relevant date. This is to ensure that the shares are priced fairly and not undervalued.

Steps Involved in Conducting a Successful QIP

The following are the typical steps involved in conducting a successful QIP:

• Appoint an investment bank to manage the issue and receive requisite regulatory approvals.
• Draft a placement document that includes details such as the offer size, issue price, and other relevant disclosures.
• Conduct roadshows and meet with potential investors to gauge their interest in the offer.
• Finalize the price of the offer based on investor demand and market conditions.
• Issue and allot the securities to the eligible investors within a stipulated time frame.

However, conducting a successful QIP involves more than just these steps. It is important to also ensure that the company’s financials are in order and that there is a clear strategy in place for the use of the funds raised through the QIP. Additionally, it is crucial to maintain transparency and communication with investors throughout the process, providing regular updates on the progress of the QIP and addressing any concerns or questions they may have. By taking these additional steps, companies can increase the likelihood of a successful QIP and build stronger relationships with their investors.

Case Studies: Successful Examples of QIPs in India

Several companies in India have successfully raised funds through QIPs. Some of the most successful QIPs in India include offerings from Adani Ports, ICICI Bank, and Axis Bank.

Adani Ports raised INR 3,000 crore through its QIP in 2020, which was oversubscribed by 1.4 times. The funds were used to finance the company’s expansion plans and reduce debt. Similarly, ICICI Bank raised INR 15,000 crore through its QIP in 2021, which was the largest QIP by an Indian bank. The funds were used to strengthen the bank’s balance sheet and support growth initiatives.

Axis Bank also raised INR 10,000 crore through its QIP in 2020, which was oversubscribed by 2.56 times. The funds were used to enhance the bank’s capital adequacy ratio and support business growth. These successful QIPs have not only helped these companies raise funds but have also boosted investor confidence in the Indian capital markets.

Top Companies That Have Raised Funds Through QIPs

Over the years, several companies have raised significant funds through QIPs. Some of the notable companies include Axis Bank, Reliance Communications, and ICICI Bank.

Another company that has raised a substantial amount of funds through QIPs is HDFC Bank. In 2019, the bank raised Rs. 8,500 crore through a QIP issue, which was oversubscribed by more than three times. The funds were used to strengthen the bank’s balance sheet and support its growth plans.

Additionally, Tata Steel also raised Rs. 12,800 crore through a QIP issue in 2020. The funds were used to repay debt and strengthen the company’s balance sheet. The QIP issue was oversubscribed by more than five times, indicating strong investor interest in the company.

Tips for Investors Planning to Invest in QIPs

QIPs could be an attractive investment opportunity for several institutional investors. However, it is essential to gauge the company’s financials, management, and potential growth prospects before investing in the offer. Likewise, investors need to stay updated on the regulatory framework and market conditions before investing in QIPs.

Additionally, investors should also consider the pricing of the QIPs. It is crucial to evaluate whether the offer price is reasonable compared to the company’s current market value and future growth potential. Moreover, investors should also assess the dilution impact of the QIPs on the company’s existing shareholders. Dilution occurs when the company issues new shares, which reduces the ownership percentage of existing shareholders. Therefore, investors should carefully analyze the dilution impact and assess whether the potential returns from the investment outweigh the dilution effect.

Future Prospects of the QIP Market in India

The QIP market in India has been growing steadily over the years. As companies continue to seek new avenues of fundraising, QIPs will likely continue to be an attractive option. With the regulatory framework becoming more streamlined, companies and investors can expect easier access to QIPs in the future.

In Conclusion, QIPs are one of the most popular equity fundraising options for companies in India. With its benefits and drawbacks, companies need to consider all aspects before choosing the right equity-raising method. By adhering to the regulatory framework and following the correct process, QIPs can be an attractive fundraising option for companies looking to raise capital.

One of the key advantages of QIPs is that they allow companies to raise capital quickly and efficiently. This is particularly important for companies that need to fund new projects or expand their operations. QIPs also provide companies with access to a wider pool of investors, which can help to increase their visibility and credibility in the market.

However, there are also some potential drawbacks to QIPs. For example, companies may need to dilute their ownership in order to raise the necessary capital. Additionally, QIPs can be more expensive than other forms of equity fundraising, due to the fees associated with underwriting and marketing the offering.