What Is a Qualified Institutional Placement (QIP)?
Introduction
A Qualified Institutional Placement (QIP) is a fundraising tool for companies to raise their respective capitals. A company uses QIPs to issue equity shares, fully and partly convertible debentures or any security other than warrants, that are convertible into equity shares. The Securities and Exchange Board of India (SEBI) initiated the QIPs' rule for companies to avoid reliance on foreign capital resources. Qualified Institutional Buyers (QIBs) are the only institutions authorized to acquire QIPs.
What is the definition of QIP?
In the Securities Regulations, QIP is defined as “allotment of securities by a listed company to the Qualified Institutional buyers on private placement basis”.
The Companies Act defines “private placement” as an offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through the issue of a private placement offer letter.
As mandated by the provisions of Companies Act, 1956 and 2013,
- (a) The company that wants to do QIP must have listed the same type of shares in a recognized national stock exchange.
- (b) Listing of shares should have been done one year before the QIP.
Who are Qualified Institutional Buyers (QIBs)?
Qualified Institutional Buyers can be any entity from the below table:
| Entity Type | Example |
| National Investment Fund (NIF) | UTI Asset Management Company Ltd/ SBI Funds Management Private Ltd/ LIC Mutual Fund Asset Management Company Ltd |
| Any Provident Fund with a minimum corpus of 25 Crore Rupees | Public Provident Fund (PPF) India |
| Any Mutual Fund/Venture Capital Fund/Alternative Investment Fund/Foreign Venture Capital Investor Registered with SEBI | Aditya Birla Sunlife AMC Limited/Sequoia Capital India |
| Any Bilateral or Multilateral Development Financial Institution | Asian Development Bank (ADB) |
| Any Scheduled Commercial Bank | State Bank of India/ICICI Bank Ltd |
| Any Insurance company registered with the Insurance Regulatory and Development Authority of India | Life Insurance Corporation of India, HDFC Standard Life Insurance Co. Ltd. |
| Any State Industrial Development Corporation | Small Industries Development Corporation/Maharashtra Industrial Development Corporation |
| Any Public Financial Institution as defined in Section 4A of the Companies Act, 1956 | Industrial Credit and Investment Corporation of India Limited, Industrial Finance Corporation of India |
Why do companies go for Qualified Institutional Placement (QIP)?
Speedy Execution – Since prominent financial expert buyers are buyers in the QIP, SEBI is not required to inspect this process much. Hence, the execution is comparatively faster as it involves lesser complications.
Cost efficiency: IPO/ Rights / FPO are costly in undertakings. These methods require a huge team and the involvement of auditors, lawyers, and bankers. The endorsement could take at least 4 to 5 months or more. Besides, the fees to be paid to the exchange are less if QIP is opted. This route enables these investors to buy a notable stake at a relatively lower price.
Gives access to longer-term capital: As Capital is raised in QIP for a longer tenure, it benefits entity to overcome difficult times.What are the rules for issuing QIP?
The company offering QIP should issue a minimum of 10% of the total allotment to Mutual Funds.Promoters of the company that issues QIP cannot participate in it.If the issues size is more than ₹ 250 crore, there should be at least 5 buyers. Any single buyer cannot be allotted more than 50% of the stake.If the issue size is up to ₹ 250 crore, there should be at least 2 buyers.What are the Advantages of Qualified Institutional Placement (QIP)?
Qualified Institutional Placement is considered as the quickest manner by which an entity can boost its assets without undergoing or indulging any hefty process.FPO and rights issues demand a lot of time consumption and investments to undergo the documentation and other legalities.The Qualified Institutional Placements method saves extra costs which comparatively requires security when it issues by any other mode.In cases where a company cannot directly buy a large stake from the market as it might create the instability for the scrip., by issuing QIPS it can attract investors.QIP leads to convenient and greater bargaining as it enables raising and purchasing well at suitably bargained costs.Eventually, in the case of QIP the direction to reach a floor price, is the calculation of the average stock price of the last two weeks. But in the case of favored allocation, it is the average stock price of the last six months from the cut-off date.Note: - The cut-off date for calculation of average stock price is the date which is 30 days before the date when shareholders meet and exercise the fresh equity issue.What can a retail investor conclude from this?
If a company is conveniently capable to raise money from QIBs via QIP even in such unlikely times, it exhibits the good financial health of the company as well as displays Institutional Investors’ confidence in the business model.Once a company favorably engages in QIP, there is a fascinating hike in the share price of the company. This registers the overall positive opinions of the shareholders of the company.Pricing of Qualified Institutional Placement (QIPs)
SEBI has formulated a formula to decide the issue price under the QIP route. As per the Issue of Capital and Disclosure Requirements (ICDR) Regulations, issue of securities via QIP route shall be performed:
“At a price not less than the average of the weekly high and low of the closing prices of the equity shares of the same class quoted on the stock exchange during the two weeks preceding the Relevant date”.Relevant date – The date of the meeting in which the board of directors of the issuer (company) or the committee of directors duly authorized by the board of directors of the issuer (company) decides to open the proposed issue.Latest QIPs issued in India in 2021
| Name of the company issued QIP | Amount Raised through QIP |
| HDFC Ltd | 14,000 crores |
| Bank of Baroda | 4,500 crores |
| Godrej Properties | 3,750 crores |
Conclusion
QIPs are helpful for several reasons. In one financial year, a company can raise 5 times its net worth established on the audited financial reports of the previous financial year. If the company’s long-term fundamentals are certainly engaging, it will be difficult to find sellers, notably at the price at which the new investor would desire to procure the stake. The Qualified Institutional Placement is one of the sources where companies can raise capital without engaging in legal obligations. In broad terms, the purpose of issuing QIP is to scrap the debts. The QIP process has multiple advantages for a company like it is easy to reach the capital aims. It does not require any documentary process with SEBI which saves time for a company and there is no limitation period for the investor to invest.
