Qualified Institutional Placements

Abstract:
Post financial crisis scenario, Indian stock markets were facing boom of Qualified Institution Placements (QIPs) mainly by real estate giants like Unitech & India bulls infrastructure. News of issuance of QIP made a permanent place in all the dailies every day. QIP is a cost-effective and time saving fund raising tool for any organization, so every one of them looking to get a pie of it. But the motive behind this paper is to find out that what influences the companies to race for QIPs in current scenario and why wouldnt they be following Initial Public Offer (IPO) route as they used to do previously? This paper throws some light on the regulations involved in issuing QIP, their benefits and drawbacks while answering the above question.

Introduction:
The oxygen of any business is funds or cash which keeps it going indefinitely as per the Going Concern Concept of GAAP principles. There is plethora of sources from where an organization can raise funds for accomplishing activities of expansion, growth and diversification. These funds could be raised either from domestic market or foreign market. Raising funds from domestic market involves the options of IPO for equity shares, preference shares and/or debentures; bank loan and finally QIP. Whereas raising funds from foreign market involves the route of ADR/GDR/FCCB. All these modes are highly differentiated in respect to the ownership dilution, cost of issue, time of issue, increased liability, more regulations etc.

But the major focus of this paper is on QIP (which is one of the method of raising money from domestic markets) so lets discuss it. QIP can be simply defined as the method of raising money/funds from the market by issuing equity shares, fully and partly convertible debentures or

any securities excluding warrants to a Qualified Institutional Buyers (QIBs) by any listed company in India. It is the cost-effective and time saving tool for raising money in comparison to IPO or bank loans. Now the question arises why QIP? In FY 2004-05 the total inflow of ADR/GDR funds was around $2.5 billion which is projected to $ 4.5 billion in current fiscal. From this data we can analyze that how rapidly Indian firms are moving abroad for raising money and the only reason behind this is presence less regulations as compared to SEBI regulations. In order to maintain liquidity in Indian market and motivate corporates to raise money here, SEBI launched QIP scheme in 2006 with less regulations and flexibility. Over a month since April, the money raised through QIPs has already exceeded the Rs. 3586 Crore raised in the whole of 2008. Also 114 companies are in QIP queue to raise $ 18 billion from the market which includes Sterlite Industries, Reliance Infrastructure, Hindalco Industries ($500 million), Axis Bank ($ 71.4 million), Adani enterprises (Rs. 15000 million), Educomp Solutions Ltd. (Rs. 6067 million) to name a few.

QIP rules & regulations:

Under QIP Scheme of SEBI, company who wishes to raise fund through this mode should be listed on an exchange and needs to issue minimum of 10% of the securities to mutual funds. Moreover, it is mandatory for the company to ensure that there are at least two allottees for the size of issue of Rs. 250 Crore and at least five if the size is more than Rs. 250 Crore. These instruments are basically meant for Qualified Institutional Buyers (QIBs) who are institutional investors, perceived to possess in evaluating and investing in the capital market. These includes, public financial institutions, scheduled commercial banks, mutual funds, FIIs, provident funds, pension funds, venture capital funds, insurance companies, etc. Though these regulations were made quite flexible and easy way for the companies to raise their funds but due to fluctuating and cyclical pattern of crest & trough (boom & fall) of worlds economy, affected the market heavily and lowered the investors expectations. To remain operational companies need fund and under such liquidity crunch its very hard to influence investors to invest in their company.

Boom & crunch in QIP issue:

In Pre-Lehman fall era, QIP was not so famous in the capital markets instead companies took the IPO route since investors are optimistic about the market and ready to take risks. At that time, investors emotions were high because of rapid and large growth in countrys as well as worlds economy. Indias GDP before Lehman fall led financial crisis i.e. around 2007 & early 2008 was at 9.3% approximately and similarly stock exchanges (economic barometers) were doing extremely good and were at their highest level in their history, for instance, BSE Sensex crossed 21000 marks and NSEs Nifty crossed 6000 points in January 2008.

But this situation flipped after the great financial tsunami which was driven by the bankruptcy of Lehman brothers and subsequently all its associated companies directly or indirectly. After this crisis, liquidity crunch happened all across the globe (thanks to globalization) and markets plunged drastically. Due to great efforts put in by RBI & SEBI for revival of the economy by creating liquidity in the market, investors starts to get stable and started trusting companies fundamentals. But this period of stability doesnt remained for much time and Satyams Fraud Saga happened which surprised the every investor and was an example of lack of corporate governance and one of the biggest frauds that investors fraternity could think of. All above events are sufficient enough to shake the investors emotions due to which they become risk averse and start doubting every company in the market, which ultimately leads to failure of many IPOs like the Gujarat State Petroleum Corporations IPO for raising $ 1 billion, got delayed by two months. Thought this is not the sole reason for IPO failures but it could be one of them. After this atrocious situation companies were left with an option to raise money from foreign markets. Then, SEBI introduced the fastest capital raising tool on May 2006 called Qualified Institutional Placement (QIP) to prevent listed companies in India from developing an excessive dependence on foreign capital like ADR/GDR. These companies were allowed to raise capital from its domestic markets without the need to submit any pre-issue filling to the regulator. The main logic behind using this tool was that it is easy to convince couple of big investors like QIBs than the whole public which involves a huge cost as well for advertisements etc. If we look at the previous trends most of real estate companies came up with the QIPs (because real estate sector was one which was one of the cause of crisis (subprime mortgage crisis)) e.g., Unitech raised $ 325 million through QIP and was the successful one in doing that which was followed by Shobha developers who raised Rs. 526.89 Crores, Nagarjuna Constructions came up with QIP of Rs. 550 Crore etc. Following this trend other non real estate companies also joined in like Suzlon energy came up with Rs. 2000 Crore, Shree Renuka Sugars with QIP of $ 105 million then Max India and Bank of Rajasthan were quite a few with target of Rs. 400 Crore and Rs. 250 Crore respectively. Various companies raises funds through QIP for various reasons e.g., Shree Renuka raised funds to expand the companys refining capacity, Tech Mahindra raised it to retire its debt, Bank of Rajasthan raised to meet Basel-II adequacy norms etc. Various Companies raises funds to meet their diversified needs based on their nature of business and kind of operations they are in. After few successful QIP like that of Unitech & Indiabulls real estate, every second company started issuing QIP to raise money either to meet their working capital needs or to retire their debt, these issues started declining. The major reason behind their decline is the method of pricing of these issues by SEBI. According to SEBI, the price of issues should not less than the higher of the following:

(i) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date; (ii) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the two weeks preceding the relevant date. Due to this fixed formula for QIP pricing, if suddenly market emotions falls like we have seen during post budget session in July 2009, the stock prices began to fall. And, in that condition instead of going for high valued QIP (historical average prices of weekly high and weekly low); investor will choose to buy from the market at low prices. For example, companies which have managed to raise the money from the market using this tool had to downsize their issues, like, shobha developers which could raise only $ 111 million against $ 300 million planned initially.

Implications of QIP:
Because of lack of lock-in period QIBs are likely to exit from issue whenever market shows upward trend and as majority of investors in India trade only on speculative basis, they also start selling their ownership rights which could affects the companys image. Another issue related with QIP and could be dangerous for issuing company is dilution of the ownership. QIPs allow an investor to buy majority stocks in the company which leads to dilution of control and ownership of the company which could prove fatal to the company. It could give an easy entry for the competitor and increases the takeover implications.

Benefits of QIP:
Companies prefer QIPs mainly for two reasons: (i) time saving because of less formalities and regulations and (ii) Cost efficient because companies have to pay incremental fees to the exchange only and all other issue related costs are scrapped. QIBs prefer QIPS because of provision of no lock-in period i.e., they can sell their shareholding at any point of time and they are also not bound to keep it for six months or whatever minimum requirement of SEBI is there for other issues. Also they get directly, a major share of ownership holding in any organization.

Conclusions:
The major concern is for those companies who use QIP to raise money for retiring their debt. It is like selling oneself to pay the debt. Though the debt is removed from the balance sheet by this method but in turn company dilutes their rights and ownerships to a major QIB or investor. So its a kind of bootstrap where, while coming over from a particular problematic situation, company enters another possible problematic condition. So companies must strategically work on their debt-equity mix and decide the probable uses of funds.

Despite all the negativities present with QIPs, it is the most favorable and cost saving tool for raising money primarily in Indian markets for the companies during the low investors confidence or recessionary periods. Though QIPs are continuously losing their sheen, companies are again coming back to their previous fund raising tool i.e., IPO and many companies have already announced their IPOs e.g., Tata Power, Reliance Capital etc.

References:
http://mentorqa.blogspot.com/ - Analyzing QIP - Q & A - S Murlidharan. www.investopedia.com/qip.htm http://moneyworks4me.com/ - Title QIP the latest trend - By Prateeksha http://www.iimahd.ernet.in/~jrvarma/blog/ -Rethinking sebi pricing guidelines - Prof. Jayanth R. Verma http://feedproxy.google.com/~r/shabbir/~3/RcIJhqK4Ra8/ - Shabbir http://livemint.com - Sandeep Parekh - QIP Pricing all is well http://vccircle.com - QIP companies plan raise Rs. 7670 Crore - Ruchika Sharma http://www.wikipedia.org - Qualified Institutional Placement http://www.sebi.gov.in - sebi guidelines on qip - Neelam Bhardwaj - DGM http://www.economictimes.com/what is qip.htm - 5 June 2009 http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aeQtwKd2xBs4