What is Qualified Institutional Placement (QIP)?

3 min read
What is Qualified Institutional Placement (QIP)? Who can participate in QIP? Benefits of QIP? What can retail investors infer from QIP?

What is QIP and what are its benefits? What should a retail investor infer from QIP?

Introduction

In the last one month, we have heard companies/ banks like HDFC Limited, ICICI bank, Axis bank raising ~INR 35,000 crore through Qualified Institutional Placement (QIP) route. Prior to this, companies like Avenue supermart, Kotak Mahindra Bank, Bharti Airtel, etc have also opted this route to raise capital. In this blog, let us understand about QIP in detail.

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Qualified Institutional Placement

What is QIP?

  • It is basically a fundraising tool, where by a company can raise capital from institutional investors.
  • The buyers involved in this process are called as Qualified Institutional Buyers (QIB). QIBs are registered with SEBI.
  • Indian companies used to prefer raising funds from foreign markets as raising capital in domestic markets involved lot of complications.
  • To avoid dependence on foreign capital resources, SEBI came up with the route of QIP to issue shares. This route does not involve much complications like IPO,FPO, rights issue,etc.

Why do companies opt for QIP?

  • Faster Execution – As the process involves lesser complications, it is comparatively faster.
    • Since well known and financial expert buyers (QIBs) invest in this process, SEBI does not need to scrutinize this process much.
  • Price discount – Institutional investors usually want a significant stake in the company. If they plan to buy this stake from open market, it will cost them much higher. This route allows these investors to buy a significant stake at a comparatively lower price.
  • Provides access to longer term capital: Since the capital raised in QIP is used over a longer term, it helps banks/ companies to overcome difficult times.
    • For example, banks have raised capital through QIP to be well prepared in case NPAs rise after the moratorium period is over.
    • Similarly companies like Avenue supermart has opted for this route as it wanted to reduce promoter holding below 75%, Bharti Airtel opted for QIP in order to reduce debt on its books.
    • Thus, there are various motives behind a QIP offer and they vary from one company to another.

Rules for Issuing QIP

  • If the size of the issue is up to INR 250 crores, there should be at least two buyers (QIBs). If the size of issue is above INR 250 crores, there should be at least 5 buyers (QIBs).
  • Similarly, if the issue size is more than INR 250 crores, a single buyer cannot be allotted over 50% stake.
  • Promoters of the company cannot participate in this type of issue.
  • The company should issue minimum of 10% of the total allotment to Mutual Funds.

What can a retail investor infer from this?

  • If a company is comfortably able to raise money from QIBs through QIP even in such uncertain times, it reflects about the good financial health of the company as well as shows institutional investor’s belief in the business model.
  • Also once a company successfully undertakes QIP, there is a some increase in share price of the company. This indicates the overall positive sentiment of the shareholders of the company.

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