Qualified Institutional Placement

[Submitted by Dharmanshu P. Kajaria,
CA(final) student,
Mumbai, Maharashtra]

July 11, 2009

India Inc seems to be on a funds raising spree. Recently companies like Hindalco, Bajaj Hindustan Limited, Emami, HREL have gone for QIP’s to raise funds.

According to estimates, only five companies have raised about Rs 8,500 Crore since April 2009, of which 95 per cent of the amount is on account of DLF, Unitech and India bulls Real Estate.

Excluding the five companies, there are 39 others that have announced plans to raise a total of Rs 53,900 Crore through the qualified institutional placement (QIP) route (issue of equity, warrants, etc), while a few others are yet to announce pricing details. This is significant as compared to the previous two years. Like every coin has two sides, the move to raise funds also has its set of pluses and minuses. Let us now understand the concept called QIP in detail as below.

What is QIP?

Qualified institutional placement (QIP) is a capital raising tool, primarily used in India, whereby a listed 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 speedy method of private placement whereby a listed company can issue shares or convertible securities to a select group of persons. Companies going for QIP do not have to undergo elaborate procedural requirements to raise this capital.

Why was it introduced?

In order to prevent listed companies in India from developing an excessive dependence on foreign capital SEBI introduced the QIP process through a circular issued on May 8, 2006. Prior to the innovation of the qualified institutional placement, there was concern from Indian market regulators and authorities that Indian companies were accessing international funding via issuing securities, such as American depository receipts (ADRs), in outside markets. The complications associated with raising capital in the domestic markets had led many companies to look at tapping the overseas markets. This was seen as an undesirable export of the domestic equity market, so the QIP guidelines were introduced to encourage Indian companies to raise funds domestically instead of tapping overseas markets.

Who can participate in the issue?

The specified securities can be issued only to QIBs, who shall not be promoters or related to promoters of the issuer. The issue is managed by a SEBI-registered merchant banker. There is no pre-issue filing of the placement document with SEBI. The placement document is placed on the websites of the stock exchanges and the issuer, with appropriate disclaimer to the effect that the placement is meant only for QIBs on private placement basis and is not an offer to the public.

Qualified Institutional Buyers (QIBs)

Qualified Institutional Buyers (QIB’s) are those institutional investors who are generally perceived to possess expertise and the financial muscle to evaluate and invest in the capital markets. QIB’s shall mean

1. Public financial institutions;
2. Scheduled commercial banks;
3. Mutual Funds;
4. Foreign institutional investor registered with SEBI;
5. Multilateral and bilateral development financial institutions;
6. Venture Capital funds registered with SEBI.
7. Foreign Venture Capital investors registered with SEBI.
8. State Industrial Development Corporations.
9. Insurance Companies registered with the Insurance Regulatory and Development Authority (IRDA).
10. Provident Funds with minimum corpus of Rs.25 crores
11. Pension Funds with minimum corpus of Rs. 25 crores

"These entities are not required to be registered with SEBI as QIBs. Any entities falling under the categories specified above are considered as QIBs for the purpose of participating in primary issuance process."

Eligibility criteria

1. Presently, the eligibility criteria for listed companies desirous of making QIP include a condition that the equity shares of the same class of such companies shall have been listed on a stock exchange having nationwide terminals, for a period of at least one year as on the date of issuance of notice to shareholders for considering the QIP.
    
2. It is noted that companies, which have been listed during the preceding one year pursuant to approved scheme(s) of merger/ demerger/ arrangement entered into by such companies with companies which have been listed for more than one year in such stock exchange(s), are not able to use the QIP route for raising funds. In order to enable such companies to raise funds through QIP route, it has been decided that for the purpose of fulfillment of the abovementioned eligibility criterion, such companies may take into account the listing history of the listed companies with which they have entered into the approved scheme(s) of merger/ demerger/ arrangement.
    

Pricing norms for QIP

In order to facilitate eligible listed companies to raise funds through QIP route, it has been decided to modify the pricing guidelines for QIP by bringing the issue price of the securities offered closer to their market price. This has been effected through change in the floor price formula and definition of relevant date ("relevant date" for the purpose of this clause means the date of the meeting in which the Board of the company or the Committee of Directors duly authorised by the Board of the company decides to open the proposed issue”)

Lock -in – Period

However, unlike a preferential allotment of shares which carry a one-year lock-in, QIPs do not have any lock-in period.

Impact on Investors, Co’s earnings

The flip side is that the fund-raising exercise will most likely lead to an equity dilution and hence, the impact on the company’s earnings. Thus, investors need to examine the details carefully to gauge the net impact on earnings. This includes the instrument being used for raising funds, the timeframe and the issue price among a few others.

The other issue arises from the possibility of some companies not being able to raise the proposed funds (due to volatile market conditions) and the willingness of investors to invest at current valuations.

Why is India Inc taking the QIP route?

Jagannadham T, Equity Head, SMC Capitals, said QIPs have found market favour as it is a quick way to raise capital. “In case of an IPO, follow-on public offering), or any other fund raising mode, it would take about four-five months, whereas in the case of a QIP, everything can be wrapped up in a matter of four-five days. There is no lock-in as in the case of a preferential allotment. Also, no SEBI approval is required for the same.”

There is a whole bunch of companies applying for QIPs. Although the first two-three especially in the realty space did well in terms of QIPs, do you think a fatigue factor has set in. Is there resistance to buying future QIPs?

The success of QIP was essentially because of its very limited regulatory restrictions and very quick turnaround that can happen. In case of an IPO or any other fund raising mode, it would take about four-five months whereas in the case of a QIP everything can be wrapped up in a matter of four-five days. That is the main reason why QIPs have such a robust performance in the last 45-50 days. Even in the last 45-50 days, even the capital market went up by 90%. Naturally, corporate and investors were looking what is the easiest and the quick way to cash in upon the secondary market revival. So, the obvious answer was QIP because naturally everything can be wrapped in very short span of time because Sebi’s approval is not required there. Post the success of Unitech and Indiabulls’ QIPs others followed suit.

The Difference

There are some key differences between the SEC’s Rule 144A and the SEBI QIP Scheme such as the SEBI pricing guidelines and the US rule that a private placement under Rule 144 A must be a resale and not a direct issue by the issuer. In addition, the target audience of both regulations is different -while the impetus behind Rule 144A was to encourage non-US issuers to undertake US private placements, the impetus behind the SEBI QIP Scheme was to encourage domestic Indian issuers to undertake domestic Indian private placements. Nonetheless, the intention of both regulations is to encourage private placements in the domestic markets of the US and India, respectively.

Benefits of Qualified Institutional Placements

Time Saving:
QIBs can be raised within short span of time rather than in FPO, Right Issue takes long process.

Rules & Regulations:

In a QIP there are lesser formalities, in regard to rules and regulation, as compared to Follow-on Public Issue (FPO) and Rights Issue.

A QIP would mean that a company would only have to pay incremental fees to the exchange. Additionally in the case of a GDR, you would have to convert your accounts to IFRS (International Financial Reporting Standards). For a QIP, company’s audited results are more than enough

Cost Efficient:

The cost differential vis-à-vis a ADR/GDR or FCCB in terms of legal fees, is huge. Then there is the entire process of listing overseas, the fees involved. It is easier to be listed on the BSE/NSE vis-à-vis seeking a say Luxembourg or a Singapore listing.

Lock-In: It provides an opportunity to buy non-locking shares and as such is an easy mechanism if corporate governance and other required parameters are in place.

THE EQUITY TRADE-OFF
Rs (Crore)	Proposed amount	Purpose	Equity capital		Net sales	% Chg y-o-y	Net profit	% Chg y-o-y	CMP (Rs)	PE (x)	Debt-^ equity	Market cap
			Existing	Dilution (%)
Adani Enterp	1,500	Expansion of businesses	24.7	7.9	26,236	33.9	505	34.4	722	35.2	3.2	17,792
Akruti City	2,500	Funding projects, repay debt	66.7	42.7	673	73.5	486	84.8	585	8.0	1.0	3,904
Anant Raj Inds	2,000	Funding new projects & land	58.9	40.6	351	-34.7	308	-13.7	115	11.0	0.1	3,379
Essar Oil	10000	Capex, repay debt	1218.1	31	37,969	-	-514	-	168	-41.4	2.8	21,283
GMR Infra	5,000	& upcoming projects	364.1	14.3	4,131	72.3	139	-47.0	159	208.1	1.4	28,976
GVK Power	2,500	Fund infusion in subsidiaries	140.6	31	353	-22.9	98	-28.8	42	60.8	0.9	5,925
H D F C	4,000	HDFC Bank warrants	284	3.5	10,783	33	2,283	-6.3	2,281	28.4	4.0	64,910
H D I L	2,837	Debt repayment	214.3	31.8	1,719	-27.8	830	-41.1	257	8.5	0.94	7,068
HCC	1,500	To retire debt and capex	25.6	38.1	3,314	7.5	125	27.8	106	21.7	3.8	2,717
JSW Steel	4,800	Capex and debt repayment	248.1	30.8	15,935	27.9	254	-84.5	707	52	1.8	13,218
LIC Housing	500	Improve CAR & expansion	85	10.5	2,829	34.9	532	37.3	570	9.1	10.7	4,841
Opto Circuits	400	Repay debt, invest in SEZ	94.2	16.8	726	68.1	189	55.2	167	14.3	0.3	2,699
Pantaloon Ret	1,000	Repay debt & expansion	31.9	15.7	6,060	29.3	137	21.9	320	44.6	1.3	6,090
PTC India	500	Invest in power assets	227.4	22.7	6,529	67.1	91	86.4	94	30.5	0.0	2,767
Rel Comm	2,500	Participate in 3G, WI Max	1032	3.9	21,960	18.5	6,149	-9.5	332	11.1	0.8	68,484
Welspun Guj.	1,175	Future growth, repay debt	88.9	24.8	5,872	46.3	234	-33.5	229	18.3	1.9	4,274
Note: Dilution in equity is indicative and is based on the current market price (CMP) and the amount proposed to be raised. Also, since the companies have indicated the use of various (one or more) instruments, the dilution in equity will depend on the type of instrument (s), the timing & pricing as per SEBI formula ^ Debt-equity is as per the latest financial year data available Source: BS Research Bureau & CapitaLine

  

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