Qualified Institutional Placement (QIP) – Meaning, Advantages & Rules

Qualified Institutional Placement (QIP) represents a mechanism through which publicly traded companies can generate capital. This is achieved by offering equities, or securities that can be converted into equity, to pre-approved institutional buyers. This popular approach to private placement allows the company to maintain its managerial control without dilution and eliminates the need for extensive paperwork typically associated with an Initial Public Offering (IPO).

What is QIP or qualified institutional placement?

QIP full form is Qualified Institutional Placements. This is a relatively recent form of raising capital in the Indian markets. It was 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.

This growing dependence on foreign funds through ADR and GRD was raising red flags for the SEBI as it would be detrimental to the control of the Indian companies in the long run. Hence, QIP was introduced as a form of raising capital against FPO which can be time-consuming and also have greater restrictions.

As per the regulations of SEBI, Indian listed companies can raise funds through QIP by issuing equity shares, fully or partially convertible debentures, or any other securities as mentioned under the notification by SEBI in this regard. Under QIP mode, listed companies can raise capital without meeting the legal requirements like submitting the pre-issue filings to SEBI. The company focuses on raising capital through a few QIB (Qualified Institutional Buyers) and other eligible investors.

What are the pre-requisites to raise money through QIP?

SEBI has laid down a few regulations for the listed companies to meet before they can raise funds through QIP. these restrictions are highlighted below.

The primary condition to avail finance through QIP is that the company has to be listed on a recognized stock exchange in India for a minimum period of 1 year before passing the resolution.
The company should also comply with the minimum public shareholding requirements as per the listing agreement.
The listed company should further allot a minimum of 10% of the listed security to a mutual fund or other QIBs (if no mutual fund is agreeable to take up the minimum portion).
The minimum number of allottees should be 2 in case the issue size is Rs. 250,00,00,000 or less and 5 in case the issue size is more than Rs. 250,00,00,000. However, no single allottee (whether in the same name or belonging to the same group or control) should be given more than 50% of the issue size under the QIP.
The allottees under the QIP cannot be related to the promotors in any case.
The price of the issue under QIP is based pon the two-week average of the share price of the company.
The total of the current placement and any previous placement in the current financial year cannot exceed 5 times the net worth of the issuer company. For this purpose, the net worth of the company will be based on the audited financial statements of the previous year.

What are some of the rules governing QIPs?

Some of the rules governing QIPs are:

Eligibility: Only listed companies are eligible to raise funds through QIPs. The minimum issue size is Rs. 100 crore, and the maximum amount that can be raised is 5 times the company’s net worth.
Securities and Exchange Board of India (SEBI) guidelines: QIPs are subject to SEBI guidelines, which mandate that the issue size cannot exceed 25% of the company’s paid-up capital in a financial year.
Minimum subscription: The minimum subscription for a QIP is Rs. 10 crore, and the maximum amount that can be raised is limited to Rs. 500 crore or 5 times the company’s net worth, whichever is higher.
Pricing: The issue price for QIPs cannot be lower than the average of the weekly high and low prices of the shares during the two weeks preceding the relevant date.
Allocation: 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.
Lock-in period: The shares issued through QIPs are subject to a lock-in period of one year from the date of allotment.
Disclosure requirements: Companies are required to make detailed disclosures to SEBI and the stock exchanges about the QIP, including information about the issue size, pricing, allocation, and use of proceeds.

Who can apply in QIP?

The SEBI guidelines also expressly mention the eligible participants of the QIP. as per these guidelines, the promoters and the relatives of the promoters are not eligible for allotment of securities under the QIP. The list of eligible persons for allotment under QIP is mentioned below.

A public financial institution as per provisions of section 4A of the Companies Act, 2013
A scheduled commercial bank
A mutual fund registered with SEBI
A foreign institutional investor and sub-account registered with SEBI
Any multilateral and bilateral development financial institution
Any venture capital fund or a foreign venture capital investor registered with SEBI
Any state industrial development corporation
An insurance company registered with IRDA
A provident fund with a corpus of at least Rs.25,00,00,000
A pension fund with a corpus of at least Rs.25,00,00,000

What are the advantages of Qualified Institutional Placement (QIP)?

QIP is fast becoming a favoured mode of raising capital for domestic companies. The key advantages of QIP that have contributed to its popularity are mentioned below.

a. Time-saving mode of raising capital

The time period required for raising capital through QIP is quite less as compared to other options like FPO or rights issues. This allows the companies to raise capital in a timely manner in a time span as low as one week as compared to other options which can take up to 3 months.

b. No minimum lock-in period for investors

Another advantage with respect to the investors is that this mode of raising finance does not levy any minimum lock-in period on the investors. Investors are therefore free to liquidate their holdings through the recognized stock exchanges if they wish to exit their investment for any reason.

c. Reduced compliances and formalities

One of the key advantages of raising capital through QIPs is the reduced compliances and simplified procedures for the issuer company. This involves no mandatory requirements like pre-issue filings or conversion of the books of accounts to IFRS. These reduced compliances further speed up the process to acquire capital and also encourage the ease of doing business in the country.

d. Reduced cost of raising finance

The cost of raising capital through QIP is considerably lower as compared to raising finances through ADRs or GDRs. The issuer company is simply required to pay an incremental fee to the stock exchange for raising finance through QIP.

e. Opportunity for retail investors

Although only QIB are allowed to participate in QIP, retail investors can also be part of the issue. The pre-requisite for QIP relating to a mandatory 10% allotment to mutual funds allows the retail investors to participate in the issue and have a chance at diversifying their portfolio.

f. No third party involvement in determining the valuation

The only restriction in determining the price for the issue under QIP is the restriction laid by SEBI regarding the floor price. Apart from this restriction, the buyers and the issuer are free to determine the issue price based on the simple demand-supply functions without any interference from any third party. This makes it an attractive option for the issuer as well as the buyer in comparison to other forms of raising capital.

Conclusion

Qualified Institutional Placements (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. In essence, QIPs are often used to eliminate debts. The advantages of the QIP process include ease in achieving capital goals, bypassing the need for documentation with SEBI, thus saving time, and no restrictions on the investment duration for the investor.

FAQs

What is the time frame for raising capital through QIPs?

The time frame for raising capital through QIP is approximately 1 week

Is QIP available for retail investors?

Investment in the issuer company through QIP is available only for QIBs. Retail investors can participate in the QIP through the mandatory 10% allotment to mutual funds.

When was QIP as a mode of financing introduced in India?

QIP as a mode of raising capital was first introduced in the year 2006 by SEBI.

Who are deemed to be relatives of the promoters as per guidelines for the issue of securities under QIP?

The following persons having all or any of the following rights are deemed to be relatives of promoters as per the guidelines for the issue of securities under QIP.
-Right to the appointment of nominee directors to be included in the Board of the issuer company.
-Rights under any shareholders agreements or listing agreement that is entered with any promoter or any other person that is related to them.
-Veto rights

Can a private company raise capital through QIP?

No. the option to raise capital through QIP is available only to companies listed on recognized stock exchanges.