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There are many ways in which companies can raise capital through the financial markets. If they wish to go public, they can raise fresh capital from the general public through issue of securities. The securities offered may be through various channels such as an Initial Public Offering (IPO), follow-on-public offer (FPO), preferential issues, and through qualified institutional placement (QIPs).
In QIPs, listed companies sell shares and debentures to an institutional buyer.
QIPs tend to be a faster way to raise capital as the dealing happens with a few investors. And this is why companies prefer this route - because of its convenience and less resource requirements when compared to other methods of raising equity. However, despite it being the preferred route, QIP activity has diminished in recent times. And the reason for this slowdown is the ongoing demonetisation drive and volatility in stock markets. Let us consider some facts and understand the situation briefly.
According to an article in the Financial Express, volatile markets and a general slowdown in the economy have dampened fund raising through the QIP route in 2016. The amount raised through QIPs so far this year stands at Rs 45 billion This is recorded as the lowest in five years. In comparison, companies raised Rs 317 billion and Rs 191 billion through QIPs in 2014 and 2015, respectively.
Also, this steep fall comes in a year when companies have raised over 250 billion from IPOs which is recorded as the highest in six years.
One of the reasons for the above trend is lower QIP activity witnessed in capital-intensive sectors. Sectors such as infrastructure, power and real estate, where capital-raising tends to be in large sizes, have seen the lowest QIP activity this year. In contrast, QIP activity in 2014 was driven by these sectors.
Apart from the above, many companies have cancelled or postponed their QIP plans as demonetisation and a general slump in the economy has pushed their stock valuations lower.
Going forward, there could be further slowdown in the QIP activity in the short term. That said, it remains to be seen whether fundraising through QIPs will increase once the dust of demonetisation settles down.
Speaking of demonetisation, Vivek Kaul has come up with an insightful little report on this subject, Demonetisation: The Good, Bad and Ugly. It has some great information on how demonetisation could impact things like your investment and your property.
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