If you are interested in investing in the stock market, you might have heard the term QIP. QIP stands for Qualified Institutional Placement, a method of raising funds by issuing shares to qualified institutional buyers. In this article, we will discuss what QIP is, how it works, and its advantages and disadvantages.
What is QIP?
QIP, or Qualified Institutional Placement, is a method of raising capital by issuing securities to institutional buyers. The term “qualified” refers to the fact that only a certain category of investors, such as mutual funds, insurance companies, and pension funds, are eligible to participate in a QIP.
How does QIP work?
When a company decides to raise capital through QIP, it appoints an investment banker who helps it to determine the issue price and the number of shares to be issued. The investment banker also helps the company to prepare a placement document that contains information about the company’s financial performance, business strategy, and future prospects.
The placement document is then sent to institutional buyers who are eligible to participate in the QIP. The buyers submit their bids indicating the number of shares they are willing to purchase at the issue price. The company then decides the final allocation of shares based on the bids received.
Eligibility criteria for QIP
To participate in a QIP, an institutional buyer must fulfill the following eligibility criteria:
- It must be a registered entity with the Securities and Exchange Board of India (SEBI).
- It must have a net worth of at least INR 100 crores.
- It must have a minimum investment portfolio of INR 500 crores.
Advantages of QIP
QIP has several advantages for companies that want to raise capital. Some of them are:
- It is a quicker and more efficient way of raising funds than other methods such as IPO or FPO.
- It allows companies to tap into a pool of institutional investors who are willing to invest large sums of money.
- It is a cost-effective way of raising capital as the expenses involved in QIP are lower than in other methods.
- It does not require the company to go through the lengthy process of getting its shares listed on the stock exchange.
Disadvantages of QIP
Despite its advantages, QIP also has some disadvantages. Some of them are:
- It is not available to all companies as only those with a track record of profitability and sound financials are eligible.
- It may dilute the existing shareholders’ stake in the company, leading to a reduction in their control over the company’s affairs.
- The market price of the company’s shares may suffer if the issue price is set too high or if the shares are not allocated to the right investors.
Comparison of QIP with other fundraising methods
Let us compare QIP with other popular fundraising methods:
QIP vs IPO
IPO, or Initial Public Offering, is the process of issuing shares to the general public and getting them listed on the stock exchange. The main differences between QIP and IPO are:
- QIP is available only to institutional buyers, while IPO is open to retail investors as well.
- QIP is a faster and cheaper way of raising funds than IPO.
QIP vs FPO
FPO, or Follow-on Public Offering, is the process of issuing shares to the public by a company that is already listed on the stock exchange. The main differences between QIP and FPO are:
- QIP is available only to institutional buyers, while FPO is open to retail investors as well.
- QIP is a faster and cheaper way of raising funds than FPO.
- FPO may dilute the existing shareholders’ stake in the company to a greater extent than QIP.
QIP vs Rights Issue
Rights issue is the process of issuing shares to the existing shareholders of a company in proportion to their existing shareholding. The main differences between QIP and Rights Issue are:
- QIP is available only to institutional buyers, while Rights Issue is available to all existing shareholders.
- QIP is a faster and more efficient way of raising funds than Rights Issue.
- Rights Issue may not be able to raise as much capital as QIP.
QIP vs Preferential Allotment
Preferential allotment is the process of issuing shares to a selected group of investors, such as promoters or strategic investors. The main differences between QIP and Preferential Allotment are:
- QIP is available only to institutional buyers, while Preferential Allotment can be made to any selected group of investors.
- QIP is a faster and more efficient way of raising funds than Preferential Allotment.
- Preferential Allotment may not be able to raise as much capital as QIP.
QIP regulations in India
QIP is regulated by the Securities and Exchange Board of India (SEBI) under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. These regulations prescribe the eligibility criteria, the process of issue and allotment, and the disclosure requirements for QIP.
Recent developments in QIP
In 2020, SEBI allowed companies to raise funds through QIP without making a prior announcement to the stock exchange. This was done to enable companies to take advantage of the favorable market conditions without being constrained by the requirement of prior disclosure.
QIP vs IPO
QIP and IPO are both methods of raising capital from the market, but they differ in many aspects. QIP is a faster and cheaper way of raising funds than IPO, and it is available only to institutional buyers. IPO is open to retail investors as well, and it involves a lengthy process of getting the shares listed on the stock exchange.
QIP vs FPO
QIP and FPO are similar in many aspects, but they differ in their target investors. QIP is available only to institutional buyers, while FPO is open to retail investors as well. QIP is also a faster and cheaper way of raising funds than FPO.
QIP vs Rights Issue
QIP and Rights Issue are both methods of raising capital from the existing shareholders, but they differ in their efficiency and effectiveness. QIP is a faster and more efficient way of raising funds than Rights Issue, and it can raise more capital than Rights Issue.
QIP vs Preferential Allotment
QIP and Preferential Allotment are similar in many aspects, but they differ in their target investors. QIP is available only to institutional buyers, while Preferential Allotment can be made to any selected group of investors. QIP is also a faster and more efficient way of raising funds than Preferential Allotment.
Conclusion
QIP is a method of raising capital by issuing securities to institutional buyers. It is a quicker and more efficient way of raising funds than other methods such as IPO or FPO, and it allows companies to tap into a pool of institutional investors who are willing to invest large sums of money in a short span of time.
QIP has become a popular method of raising capital among Indian companies, particularly in the wake of the COVID-19 pandemic, which has created a volatile market environment.
SEBI has implemented strict regulations to ensure transparency and fairness in the QIP process, which has helped to build investor confidence. Recent developments such as the ability to issue securities without prior announcement have also made QIP an attractive option for companies.
Overall, QIP provides a flexible and efficient way for companies to raise capital, particularly in challenging market conditions. However, it is important for companies to weigh the advantages and disadvantages of QIP against other methods of raising capital, and to ensure that they comply with all regulatory requirements.
FAQs
- What is the minimum and maximum size of a QIP issue?
- The minimum size of a QIP issue is Rs. 50 crores, and there is no maximum limit.
- What is the role of lead managers in a QIP issue?
- Lead managers are responsible for managing the QIP process, including preparing the offer document, marketing the issue to potential investors, and facilitating the allotment of securities.
- Can retail investors participate in a QIP issue?
- No, QIP is available only to institutional buyers.
- Are there any restrictions on the use of funds raised through QIP?
- SEBI regulations require companies to use the funds raised through QIP for specific purposes, such as capital expenditure, repayment of debt, or general corporate purposes.
- What are the advantages of QIP over other methods of raising capital?
- QIP is a faster and more efficient way of raising capital than other methods such as IPO or Rights Issue. It is also available only to institutional buyers, who are typically willing to invest large sums of money in a short span of time.