What is QIP, why is it a preferred route for companies to raise funds

Securities allotted in a QIP are subject to a lock-in period of six months from the date of allotment.

With the stock market booming, many companies are rushing to raise capital for a variety of purposes. The Qualified Institutional Placement (QIP) route is turning out to be the preferred route for most firms llooking to raise capital. This explainer decodes the QIP and why companies like it better compared to conventional routes like follow-on public offering (FPO) or a rights issue.

First up, what is QIP?

It is a capital-raising tool allowing listed companies to raise funds from qualified institutional buyers (QIBs) by issuing fresh equity shares, fully and partly convertible debentures, or any securities other than warrants convertible to equity shares.

Who are these Qualified Institutional Buyers (QIBs)?

Public financial institutions, scheduled commercial banks, mutual funds, insurance companies, foreign portfolio investors and foreign institutional investors.

Can retail investors and high networth individuals (HNIs) invest in a QIP?

No.

Why is QIP attractive to companies?

Because it helps them avoid the lengthy and complex processes of an FPO or rights issue. Also, since QIBs are sophisticated investors, they have a long-term perspective, which helps in price stability.

Can promoters participate in a QIP?

No.

Are there rules on the minimum number of institutional buyers that should participate in a QIP?

If the issue size is more than Rs 250 crore, there should be at least five buyers. Any single buyer cannot be allotted more than 50 percent of the stake. If the issue size is up to Rs 250 crore, there should be at least two buyers.

What is the basis for pricing of a QIP?

Under SEBI regulations, the issue price should be not less than the average of the weekly high and low of the closing prices over the past couple of weeks.

Why can’t it be less than the average?

There have been allegations in the past that promoters were allotting shares to their favoured investors cheaply. The QIP price has a bearing on the stock’s market price.

Can the QIP issue be priced at a premium to the market price?

Yes, it can be. But QIBs typically ask for a discount. That is one of the reasons they participate in such a placement. They can get a good quantity without driving up the stock price, unlike buying in the open market.

What if a QIB does not have a long-term view and wants to sell the next day after being allotted the shares?

It can’t. Securities allotted in a QIP are subject to a lock-in period of six months from the date of allotment. This is intended to ensure that only QIBs with a medium to long-term view participate in the issue.