Explained| What are QIPs? Can retail investors participate in these offers?

A bunch of corporates have launched their qualified institutional placement (QIP) offers on Dalal Street in the recent past. Among them, J&K Bank, Sterling & Wilson, Indian Bank and Bank of India rolled out QIPs worth a cumulative Rs 10,750 crore in December alone.  

But what is a QIP and when do companies prefer this particular route to tap the capital market? 

What is a QIP? 

A qualified institutional placement (of shares) or QIP is a facility that enables listed companies to raise funds from the domestic market. Market regulator SEBI laid down the guidelines for the QIP route in year 2006 primarily to put a check on corporates’ over-reliance on foreign funds for financing their economic growth, and give them an alternative to tap the domestic market for their capital needs through a seamless process.  

A QIP allows a listed company to raise capital by issuing equity shares, fully or partly convertible debentures, or other securities convertible into equity shares.  

The procedure of QIP 

Unlike other financing routes, there is no requirement of pre-issue filing of the placement document with the SEBI in a QIP. Instead, the copies of the final document are furnished to QIBs only.  

The placement document is featured on the websites of the issuer and the stock exchanges bearing a disclaimer that the placement is for QIBs on private placement basis and that no offer is being made to the public or any other investor category. 

Stakeholders participating in the QIP process 

There are three main types of entities involved in the QIP process.  

Listed company considering fund raising via the QIP route or issuer: It is the listed company looking to mop up capital from the domestic market via issuance of specified securities. 

QIBs:  Qualified institutional buyers, as the name suggests, are institutional investors that have the acumen as well as the financial backing to carefully assess as well as invest in the financial markets.  As per rules, a host of entities can act as a qualified institutional buyer. These include:  

Mutual funds 

Venture capital funds 

Alternative Investment Funds  

Foreign venture capital investors 

Foreign portfolio investors other than Category III foreign portfolio investors 

Public financial institutions as defined in section 4A of the Companies Act 

Scheduled commercial banks 

Multilateral and bilateral development financial institutions 

Insurance companies 

A QIB cannot be a promoter or an entity related to the promoters of the company launching the QIP. 

Merchant bankers: A merchant banker registered with the market regulator is an entity entrusted with the task of managing the QIP issue. 

Can retail investors participate in a QIP? 

“Retail investors cannot participate in the QIPs, as they are specifically targeted to raise large sums of money from QIBs,” explains Omkar Kamtekar, Research Analyst at Bonanza Portfolio. 

Key SEBI regulations concerning QIPs 

“At present, the only regulation concerning QIP issued by the SEBI is regarding the floor price,” points out Kamtekar.  The floor price is the minimum price below which an issue cannot be priced.  

The pricing formula for a preferential allotment is the Volumes Weighted Average Price (VWAP)s of the last two weeks or the last 26 weeks, whichever is higher. 

“However, many issuers price the QIP based on the demand and supply of the stock to arrive at the floor price. This makes QIP an appealing alternative to raise funds in a seamless manner and short duration. Additionally, the floor price is generally below the market price if the counter has been in an uptrend allowing institutional players an entry at a discounted price. Furthermore, there is a lock-in period of 90 days to 6 months on the share allotted in the QIP,” adds Bonanza Portfolio’s Kamtekar. 

How does QIP score over other fundraising tools? 

QIP is a comparably favoured tool as capital through this route can be raised at a faster pace and rather conveniently. This is as the method does not involve the otherwise time-consuming procedural requirements for launching the issue such as the requirement to submit pre-issue filing with the SEBI. Fundraising through other modes, including ADR or American Depository Receipts, Foreign Currency Convertible Bonds (FCCB) and Global Depository Receipts or GDR, is more expensive as well as time-consuming.