Qualified institutional placements lose the charm as volatility dampens market sentiment

Year 2022 will be the second year when Indian companies refrained from raising funds through the qualified institutional placement (QIP) route, which was popular in the years before the pandemic.

Fundraising through QIPs declined 72 percent year on year (YoY) -- its steepest fall since 2018.

Volatility and global headwinds saw companies waiting for better days to get more bang for their buck. Fourteen firms raised around Rs 11,744 crore through QIPs so far this year, a far cry from as many as 35 companies raising Rs 42,000 crore in 2021, data from Prime Database showed.

On the other hand, initial public offers (IPOs) have been a popular route this year. That said, even IPO mop-ups have fallen dramatically, compared with 2021. As many as 38 companies raised around Rs 58,960 crore through IPOs so far this year. In 2021, 63 firms have mopped up Rs 1.19 lakh crore.

What are QIPs?

QIP is a popular instrument for listed firms to raise capital by selling shares or  debentures, fully or partly, which can be converted to stocks to institutional investors.

QIPs help companies to meet quick working capital requirements or even for setting up new capacity. While the overall QIP mop-up was waning, real-estate and financial sector firms pursued it.

Why is there a lull now?

Besides market volatility, a lacklustre economic growth after the pandemic has seen companies not raising fresh resources. After all, the private capex cycle is yet to fully revive and investment decisions haven’t actively reached corporate board rooms yet.

"While IPOs offer the flexibility of secondary sale, QIPs would involve money in the company, and, unless there is need for money, QIPs have limitations. Further, given the market volatility and lower-than-expected capex, QIPs would see a slow uptick for another 9-12 months. Also, surplus liquidity with most corporates, after the COVID era, has further reduced the need of money, and, hence, the need for QIPs in most of well-run companies," said Gopal Agrawal, Managing Director & Head, Investment Banking, Edelweiss financial services.

Companies that took the QIP route

Macrotech Developers raised around Rs 3,547 crore, the biggest QIP by size, followed by Indian Hotels Co Ltd and AU Small Finance Bank Ltd (Rs 2,000 crore each) in 2022. Vikas Lifecare Ltd used the QIP option the second time this year and raised Rs 50 crore each time.

Other companies include Restaurant Brands Asia Ltd (Rs 1,402 crore), Equitas Small Finance Bank Ltd (Rs 550 crore), Gulshan Polyols Ltd (Rs 79 crore), Jammu & Kashmir Bank Ltd (Rs 94 crore), Indiabulls Real Estate Ltd (Rs 865 crore), Salasar Techno Engineering Ltd (Rs 82 crore), Vikas Lifecare Ltd (Rs 50 crore), Ujjivan Small Finance Bank Ltd ( Rs 475 crore), and Anupam Rasayan India Ltd (Rs 500 crore).

To be sure, QIPs are unlikely to return to the top of the table of fundraising the next year, if market volatility and global events are not conducive, according to analysts.

The Sensex and the Nifty have been steadily climbing since October after having a rather subdued period from the start of the year. Since October, both Sensex and Nifty have gained 7.5 percent each.

"The volatile markets have affected the performance of the secondary and primary markets. This has disturbed the sentiment and pricing of stocks, discouraging corporates from coming to the market for funding," said Vinod Nair, Head of Research, Geojit Financial Services.

Monetary policy tightening, especially by the US Federal Reserve, is likely to keep global markets under pressure. This would weigh on domestic sentiments as well. Given that foreign institutional investors are big participants in QIPs, raising funds through this route would continue to be a challenge. That said, for the right valuation, foreign investors are willing to take exposure to Indian equities.