The availability of finance is one of the essential conditions for a business to function properly. There have been many instances where a company's lack of liquidity has had major repercussions, ultimately causing a decline in share prices or, worse, the company's demise.
Therefore, a company's liquidity and its capacity for timely capital raising are quite important. With the fast expansion of investment activity in India, stock markets are viewed as favourable for both raising capital and earning money. A company can raise capital through a variety of channels, including an IPO, FPO, QIP, etc.
In this article, we explain what QIP is and why companies choose this option.
What do you mean by QIP?
Qualified Institutional Placement (QIP) is a mechanism used by publicly traded corporations to raise capital by issuing stocks or other equity-convertible instruments to qualified institutional buyers (QIBs). With this popular private placement technique, the firm avoids dilution of its management stake and avoids having to complete the same laborious paperwork that it did for its IPO.
Since it was difficult to obtain financing on the domestic market, Indian businesses in the past raised money from overseas markets. The SEBI was concerned about this increased reliance on foreign capital because it might ultimately harm Indian enterprises' ability to manage their own destiny.
As a result, this system was designed by SEBI to prevent it and make it simpler to get credit in the domestic market. QIP was developed as an alternative to FPO, which has more limitations and can be time-consuming.
Why do companies choose the option of QIPs?
For publicly listed companies, Qualified Institutional Placement (QIP) is a secure and effective method of obtaining capital that lessens their reliance on foreign sources of funding.
Since the QIP offering and fund accessibility are much quicker than other capital-raising strategies, they shorten the issue time. This is due to the fact that QIPs are less time-consuming since they are subject to fewer legal requirements and constraints.
The restriction imposed by SEBI regarding the floor price is the only limitation on choosing the price for the issue covered by QIP. This makes it a more appealing alternative for both the issuer and the buyer when compared to other methods of generating funds.
What are the requirements mandated by the SEBI to raise capital through QIPs?
The firm must have been listed on a recognised Indian stock market for at least a year prior to approving the resolution in order to qualify for financing under QIP. The business must also abide by the listing agreement's minimum public shareholding criteria.
Additionally, the sum of the present placement and any prior placements made during the current fiscal year may not exceed five times the issuing company's net worth. The company's net worth will be determined for this purpose based on the audited financial records from the prior year.
Furthermore, if the issue size is less than or equal to Rs. 250 crore, there should be a minimum of 2 allottees, and if it is greater than Rs. 250 crore, there should be a minimum of 5 allottees. However, under the QIP, no single allottee should get more than 50 percent of the issue amount.
At least 10 percent of the securities in each placement shall be allotted to mutual funds.
In any event, there can be no family ties between the promotors and the allottees under the QIP.
In challenging economic times, a company's ability to raise capital through a QIP on the stock market demonstrates both its strong financial standing and the confidence of investors in the viability of the business model.