QIPs to QIBs: a major and long overdue move

Updated: May 18 2006, 05:30am hrs
Last week, Sebi introduced a long-overdue mode for funds raising the Qualified Institutions Placements (QIP), under which a listed company can privately place securities with Qualified Institutional Buyers (QIBs) in the domestic market.

For additional capital, a variety of routes are available: overseas issuances through GDRs/ADRs/FCCBs, preferential issues, follow-on public offerings and rights issues. The new guidelines primarily aim at offering an alternative to overseas issuances which have grown significantly in recent times and have been instrumental in exporting our capital market, thereby adversely impacting the depth and float in our domestic market. During the last three fiscal years, Indian companies raised Rs 59,567 crore abroad.

Facilitating QIP would be the lack of a lock-in requirement, which had curbed domestic preferential issues that require a one-year lock-in. However, a lock-in would have been better, maybe of just 30-45 days, so that this exercise isnt converted into a profit-making opportunity. Such placements are being wrongly compared to block deals which are secondary market operations, while a placement is a fresh issue of capital which dilutes the capital of a company and is made to some shareholders at the exclusion of minority shareholders. The infusion of capital is the object of a placement; it should deter allottees from making a fast buck.

Significantly, a large number of invest-ors who participate in an overseas issue also have a local presence. As such, selling a QIP would be similar, as the issuer would be dealing with almost the same set of buyers. However, this move will bring domestic qualified investors into the foray, including the mutual funds (MFs).

With reference to a view to encourage the MFs industry, a minimum of 10% of each placement is required to be placed with them. There is, however, a catch. The guidelines state that if no MF is agreeable to taking up the minimum portion, the same may be allotted to the other QIBs. Sebi would need to ensure that this clause in not misused as was done during the discretionary allotments in IPOs. An issuer not wanting to offer his securities to MFs may make a non-serious offer to MFs and that too to only two or three of them, and then proceed to allot to the other QIBs.

QIPs will allow listed cos to place securities with QIBs in the domestic market
Many cos are expected to prefer the QIP route because of the cost advantages
It is also simpler and faster than an overseas offering
Nevertheless, many companies are expected to prefer the QIP route to the GDR/ADR/FCCB market because of the cost advantage2% versus 5%. Moreover, the QIP will simplify the offer process and remove the time-to-market advantage of the overseas route. To begin with, at least the smaller of the overseas issues will look at it. And the issue costs will flow to the domestic intermediaries.

It is heartening that greater disclosures are being sought for QIPs, compared with those for a preferential allotment. Significantly, there will be no pre-issue filing of the placement document with Sebi; the documents have to be hosted on the exchanges websites. It is hoped that the documents as well as post-issue details like type and number of securities, price, names of allottees, and date of allotment for each placement would also be made available on the website.

It is not that the overseas route will close. There are reasons why a company goes abroad for capital: depth and quality of investors, speed and cost of issuance and presence in the companys export markets. For eg, there would be companies wanting to raise abnormally high sums of monies that the domestic market may not be able to provide. Then there would be companies wanting an overseas listing because of their presence in the markets there, or just for status.

There is another advantage. Such an issue can be made even to investors not registered with Sebi as a QIB. So, companies wanting to tap these investors may still go through the overseas issue route. There would always be some companies who wish to allot shares to friends and associates abroad for consolidating promoters holdings, or to make money by selling these stocks at huge profits.

Bottomline: QIP is a welcome move. But one which will lead to further marginalisation of retail investors. Hope the regulatory attention will now be drawn to facilitate the growth of retail investors in the capital market. The government can also play a role; a non-controversial, equitable route is to earmark all PSU divestments only in favour of the retail.

The writer is the managing director of PRIME Database