Qualified Institutional Placement (QIP) is a mechanism used by publicly traded corporations to raise capital by issuing stocks or other equity-convertible instruments to qualified institutional buyers (QIBs) . QIP is a fundraising tool that allows a company to raise capital by issuing equity shares, fully and partly convertible debentures, or any securities other than warrants which are convertible to equity shares. QIPs are a way to issue shares to the public without going through standard regulatory compliance. QIPs follow a looser set of regulations but where allottees are more highly regulated. The only parties eligible to purchase QIPs are Qualified Institutional Buyers (QIBs), which are accredited investors, as defined by the market regulator. QIPs are a relatively recent form of raising capital in the Indian markets, introduced by SEBI in 2006 after seeing the growing dependence of Indian companies on foreign sources in the form of ADR (American Depository Receipts) and GDRs (Global Depositary Receipts) to raise capital.
To be allowed to raise capital through a QIP, a firm must be listed on a stock exchange along with the minimum shareholding requirements as specified in their listing agreement. Also, the company must issue at least 10% of its issued securities to mutual funds or allottees. The allocation of shares to investors is determined by the company, subject to SEBI guidelines, which mandate that no single investor can hold more than 10% of the total issue size. The shares issued through QIPs are subject to a lock-in period of one year from the date of allotment.
QIPs offer numerous benefits. A company can leverage a QIP to raise capital up to five times its net worth based on the audited financial statements from the prior fiscal year. If a company has strong long-term fundamentals, it might be challenging to find sellers, especially at a price appealing to new investors. QIPs provide an avenue for companies to generate capital without having to navigate complex legal requirements. 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. Once a company successfully undertakes a QIP, there is generally an increase in the companys 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 may not perform well.
