Wednesday, July 1, 2009

What are QIP s ?

With most funding routes closed, Qualified Institutional Placements or QIPs seem especially alluring at the moment.

The past couple of weeks have seen quite a few companies expressing their intention to take up the QIP route.

For instance, Gammon Infrastructure Projects aims at raising Rs 500 crore as is Karnataka Bank; Hindustan Construction is looking at a Rs 1,500-crore QIP issue, while JSW Steel is seeking approval to raise about $1 billion, PTC India has collected about Rs 500 crore from its QIP this month. The list is extensive and this is just in May 2009.

So what is a QIP, and why is it so appealing? Here’s taking a look at the concept.

Private placement of shares
Under the QIP route, companies issue shares, or securities such as debentures later convertible into shares, at a fixed price to a defined set of buyers. QIPs were first thought of and permitted in 2006 in an attempt to encourage the domestic raising of funds by companies who were, at that point, tapping overseas markets for funds.

There are certain regulations that govern a QIP, defined by the Securities and Exchange Board of India (SEBI).

The price of the shares is based on the prices prevailing in the preceding two weeks.

The investors in a QIP are called Qualified Institutional Buyers (QIB), and include those institutional investors who are perceived to have the expertise and financial clout to evaluate and invest in capital markets. QIBs include mutual funds, foreign institutional investors, banks, venture capital funds, domestic and international, provident and pension funds.

Why the sudden frenzy?
A combination of factors has led to the recent flurry of QIP issues. One, debt had been the chosen means of funding for the past several quarters with equity markets in bad shape. Debt too came at a high cost.

As a result, quite a few companies carried a disproportionate quantum of debt on their books and saw interest costs swallow profits. Consequently, their ability to raise fresh debt deteriorated.

Also, borrowing may not be carried on for a prolonged period without the safety net of equity.

Two, the equity market mood has been upbeat for quite a while now, and investors appear to be a more optimistic lot. FII activity too has been on the positive side. Companies, therefore, appear to be using the current circumstances to their advantage and are looking to a speedy raising of capital.

Three, even though markets have picked up, new offers and follow-up issues in the public market, whether in the domestic market or overseas through ADRs and GDRs, carry the risk of not garnering good response. These offers are also long-drawn procedures, governed by numerous regulations.

A QIP involves a lot less hassle and regulation, ensuring its completion within a shorter span of time.

Another factor that may have given a push to QIP activity is that share prices are higher currently, allowing company to raise a larger sum of capital by issuing fewer number of shares which means lower dilution in its equity.

A lower price would have required the company to issue a larger number of shares.

SEBI also modified the time period used in computing QIP pricing — from past six months prevailing price to past two-week prevailing price.

Regulations in QIPs
QIPs may be done only by listed companies, and promoters or parties related to promoters are not allowed to subscribe to a QIP issue.

A minimum of 10 per cent of the issue should be allotted to mutual funds. The number of allottees is also defined; at least two allottees in an issue of Rs 250 crore and less, and at least five where the issue size is greater.

Also, a single entity may not be allotted more than half the issue size. Restrictions are also placed on the amount that may be raised — it cannot exceed five times the net worth of the company as on the date of the latest audited balance sheet.

Warrants in vogue
Besides private placement of shares, companies are looking to other means of fund raising while securing equity stake. Of late, the option often used is convertible warrants.

These give the holder (typically the promoters) of the warrant the option to take up shares in the company at a specified price within eighteen months of allotment of warrants.

At the time of allotment, holders are required to pay 25 per cent of the money up front, with the balance payable at the time of their conversion into equity. The recent spate in QIP announcements was accompanied by a similar bout in the number of warrant issues by companies.

The stimulating factor here is that warrant conversion prices are linked to stock prices in the preceding six months; market declines mean that promoters could up their stake in their companies at a relatively lower rate. QIPs specifically exclude the issue of warrants.

Source - businessline