All you need to know about Qualified Institutional Placement (QIP) and Qualified Institutional Buyer (QIB)

On August 5, 2020, the Board of HDFC approved the Qualified Institutional Borrowing (QIP) offering to be raised up to INR 14,000 Crore. Similarly, in the first two days of August, Axis Bank Ltd., Info Edge India Ltd., and Alembic Pharmaceuticals Ltd. launched their respective QIP offerings to collectively raise over INR 12,000 Crore. Likewise, you must have heard or read in the news that the companies are offering to raise money through QIP route. 

Do you wonder what QIP is? Or why do the companies raise money through QIP, when there are other alternatives, say for example Initial Public Offering (IPO), Foreign Direct Investment (FDI), available to them? Read the article to find out.

What led to the introduction of QIP? (Background) 

The capital (i.e. funds) for a company is like oxygen for it. A company requires capital for a variety of needs, for example, survival, development, expansion, diversification, etc. 

There are a variety of sources from which a company can raise capital. One of them is raising capital by issuing securities, like equity or debentures and by tapping either the domestic market or foreign market. 

However, raising money through domestic market used to be a very cumbersome process for companies, which is why companies turned to the foreign market for raising capital. 

To reduce this excessive dependence of the companies on the foreign market, the Securities and Exchange Board of India (SEBI) introduced the Qualified Institutional Placement (QIP) process, through a circular dated May 8, 2006.

What is QIP?

The QIP process enables the listed companies to raise finance through the issue of securities to qualified institutional buyers (QIBs). It is a tool used by publicly listed companies to raise capital (funds) domestically from institutional investors.

Who can invest in QIPs? 

QIP is a special process for easing the domestic fundraising process for the listed companies, therefore retail buyers, do not necessarily invest through this route. 

Only the group of investors, who follow certain regulations and rules formulated by SEBI are allowed to invest through QIP process. This group of investors is collectively known as a Qualified Institutional Buyer (QIB). 

Which institutions and funds are included within the definition of QIB?

According to SEBI, QIBs are defined as follows:

“Qualified Institutional Buyers are those institutional investors who are generally perceived to possess expertise and the financial muscle to evaluate and invest in the capital markets. In terms of clause 2.2.2B (v) of DIP Guidelines, a ‘Qualified Institutional Buyer’ shall mean:

• Scheduled commercial banks;
• Mutual funds;
• Foreign institutional investor registered with SEBI;
• Multilateral and bilateral development financial institutions;
• Venture capital funds registered with SEBI.
• Foreign Venture capital investors registered with SEBI.
• State Industrial Development Corporations.
• Insurance Companies registered with the Insurance Regulatory and Development Authority (IRDA).
• Provident Funds with minimum corpus of Rs.25 crores
• Pension Funds with minimum corpus of Rs. 25 crores
• Public financial institution as defined in Companies Act, 2013; “

What are the advantages of offering QIP?

• Time saving – The QIP process is a very fast way of raising money and saves a lot of time.
• Discount on share price – If an investor wants a significant stake in a company and s/he tries to buy the share from the open market, the price will be significantly higher. However, if investors go via the QIP process route, they can ask for a discounted price as well.
• Convenient – QIP is a convenient way for raising capital as compared to using the overseas markets via Foreign Currency Convertible Bonds (FCCB) or American depositary receipt (ADR) or Global Depository Receipts (GDR).
• Proper checks and balances: The QIP norms contain proper checks and balances, for example,-minimum number of allottees depending upon the size of the QIP, pricing norms, appointment of merchant banker, prohibition of withdrawal of bids, mandatory participation of mutual funds, disclosure through placement document, etc.

Which rules and regulations govern the QIP?

• The rules that govern QIP process are issued by Securities and Exchange Board of India (SEBI).
• SEBI through Guidelines for “Qualified Institutions Placement”- Amendments to SEBI (Disclosure and Investor Protection) Guidelines, 2000 introduced additional mode for listed companies to raise funds from domestic markets in the form of Qualified Institutions Placement.
• Under Chapter VIII of SEBI (Issues of Capital and Disclosure Requirement) Regulations, 2009 SEBI has laid down certain guidelines for issuance through QIP mode, which has to be complied by companies strictly for the issuance through QIP route.

Conclusion

Qualified Institutional Placement (QIP) is a simple and effective mode of raising funds for the listed companies. It has reduced the excessive dependence of the companies on global resources for meeting their capital requirements. 

QIBs also actively look for companies with a proven track record to invest in. Further, the companies are required to comply with lesser requirements in case of a QIP issue as compared to obligations arising in a retail issue as QIBs  have investment managers who are presumed to have better investment knowledge than retail investors.