What is QIP in stock market?

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What is a QIP?

QIP stands for Qualified Institutional Placement.

QIP in the stock market is a fundraising tool, whereby a company raises capital by issuing equity shares, fully and partly convertible debentures, or any securities other than warrants which are convertible to equity shares.

The only parties eligible to purchase QIPs are Qualified Institutional Buyers (QIBs), which are accredited investors, as defined by the market regulator.

This limitation is due to the perception that QIBs are institutions with expertise and financial power that allows them to evaluate and participate in capital markets, without the legal assurances of a follow-on public offer (FPO).

Why Was QIP Introduced?

The complications associated with raising capital in the domestic markets have led many companies in the past to raise funds from foreign markets via Foreign Currency Convertible Bonds (FCCB) and Global Depository Receipts (GDR) to fulfil their needs.

To reduce dependence on foreign capital and to give a push to the domestic markets, the Indian stock market regulator launched QIPs in 2006.

What are Some of the Rules Governing QIPs?

Some of the rules and regulations for a company to raise capital through a QIP are -

• The company must be listed on a stock exchange along with the minimum shareholding requirements as specified in their listing agreement.
• The company must issue at least 10% of its issued securities to mutual funds or allottees.
• The company should ensure that there are at least two allottees if the size of the issue is up to Rs 2.5 billion and at least five allottees if the issue size is above Rs 2.5 billion.
• No individual allottee is allowed to have more than 50% of the total amount issued.
• Allottees must not be related in any way to promoters of the issue.

Several more regulations dictate who may or may not receive QIP securities issues.

Why Do Companies opt for QIP?

Now that we know bits and pieces of QIP, the question remains: Why do companies want to opt for QIPs?

Here are a few points answering this:

• Apart from preferential allotment, QIP is the only other method of private placement whereby a listed company can issue shares or convertible securities to a select group of persons.
• It does not involve many of the common procedural requirements such as the submission of pre-issue filings to the market regulator.
• The QIP process saves time as access to capital is far quicker than through a follow-on public offer (FPO). The speedy process is because QIPs have far fewer legal rules and regulations to follow.
• There are also fewer legal fees and there is no cost of listing overseas, making QIPs cost-efficient.

Which Companies Have Raised Capital through QIPs Lately?

Even as the covid-19 pandemic has hit businesses across the majority of the industries, Indian financial services businesses have been the most proactive in tapping the markets to raise funds.

Kotak Mahindra Bank raised Rs 74.5 bn through via QIP to reduce its promoter shareholding whereas ICICI Bank raised Rs 150 bn under its QIP to fund its business growth and meet regulatory capital requirements.

Canara Bank also raised Rs 20 bn through its QIP issue for augmenting its Tier I capital to support growth plans and to enhance its business.

So that was a quick guide to understanding the mechanics of QIPs.

We will keep you updated on upcoming QIPs and other developments from this space. Stay tuned.

Happy Investing!

FAQs on QIP

1.What is QIP in stock markets?

Qualified Institutional Placement (QIP) is a fundraising tool through which a company raises capital by issuing equity shares, fully and partly convertible debentures, or any securities other than warrants which are convertible to equity shares.

The only parties eligible to purchase QIPs are Qualified Institutional Buyers (QIBs), which are accredited investors, as defined by the market regulator.

2. What is the difference between IPO and QIP?

Under a QIP, equity shares are available only to institutional investors whereas in an IPO (initial public offering), shares are available to the public via an open market.

For a QIP to take place, the company must already have its shares listed on a stock exchange. On the other hand, in an IPO, the company issues new securities on an exchange.

Since the public is not involved in a QIP, it requires minimum regulatory compliance & thus it is much faster than an IPO.

Meanwhile in an IPO, the company must adhere to the market regulator's guidelines. These are many and therefore it could take a while for a company to go public.

There are also fewer legal fees for QIPs and there is no cost of listing overseas, making QIPs more cost-efficient than IPOs.

3. Is QIP good for a stock?

Yes. They help raise money faster and provide the company access to long term capital.

If a company can comfortably raise money from a QIP in the share market even in uncertain times, it reflects its sound financial health and shows investors' belief in the business model.

4. What impact does a QIP have on a stock?

Once a company successfully undertakes a QIP, there is generally an increase in the company's share price.

However, this may not always be true.

If a company is allotting QIP shares at a big discount to floor price, it does suggest that the demand is not great in which case the stock price could fall.

That said, one should always look at the earnings visibility and the company's prospects from a long-term perspective.