Qualified Institutional Placement

Qualified Institutional Placement refers to allowing listed companies to obtain funds without providing market authorities with legal documentation. Companies listed on Indian stock exchanges can raise capital through the sale of shares or other assets to qualified institutional buyers (QIBs) through a qualified institutional placement (QIP). It's similar to selling shares privately, but only to well-informed buyers. QIP’s are meant to assist Indian enterprises in raising capital locally instead of overly depending on international finance. It's now a well-liked instrument for businesses to obtain the funding they require quickly. In this blog, we’ll learn about what is QIP, what qualified institutional placement meaning, and more.

How does a Qualified Institutional Placement (QIP) Works?

Let's use an example to explain how a QIP operates.

Assume that a business that is already listed on a stock exchange. It is seeking to raise ₹1,000 crores to grow its enterprise. 

1. Decision and Approval: The board of the company votes to raise the funds via a QIP and receives shareholder approval for the proposed plan.
    
2. Set up: The company uses an investment bank to oversee the preparation phase. The bank produces all the required paperwork, which includes comprehensive details on the business and its financial goals.
    
3. Pricing: Assume that for the previous two weeks, the company’s shares have been trading at about ₹500. They established a floor price of ₹490 per share for the QIP based on SEBI's calculation.
    
4. Requesting Bids: The firm extends an invitation to interested institutional purchasers to submit bids for the shares. These could include banks, insurance companies, and mutual funds.
    
5. Procedure for Bidding: The QIBs put in their proposals throughout the bidding process. For instance:
    

a. ABC Mutual Fund could place a bid of ₹500 per share for a million shares. 

b. PQR Insurance may bid for 750,000 shares at ₹492 each. 

c. XYZ Bank may bid for 500,000 shares at ₹495 each.
 

1. Allocation: Share allocation is decided after the company and its investment bank have reviewed the proposals. For example, they may decide to sell at ₹495 per share.
    
2. Finalization: The firm gets the funds and the shares are distributed to the selected QIBs.
    
3. Listing: Usually after a day or two, the new shares are listed on the stock exchange.

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What is the Procedure for QIP?

The QIP procedure is intended to be simpler and faster than the public offering process. This is a guide to how it functions. 

• Board Approval: Prior to raising funds through a QIP, the company's board of directors must give its approval. Subsequently, the company must obtain the consent of its shareholders, typically using a special resolution.
   
• Designate Lead Managers: To oversee the QIP process, the business uses investment banks or other financial organizations.
   
• File Placement Document: In order to register with the stock exchanges, the company must produce and file a placement document. All of the relevant data regarding the business and the QIP is included in this document.
   
• Decide on the Floor Price: The minimum price per share is set by the company. Typically, this is based on the mean stock price over a specific period.
   
• Book Building: Interested QIBs put in bids, specifying the quantity and price of shares they wish to purchase.
   
• Allotment: The business issues the securities and chooses how to divide the shares among the bidders.
   
• Listing: Following that, the new shares are put on the stock exchanges. This process is typically far faster than a standard public offering, taking only a few weeks to complete.

What are Some of the Rules Governing QIPs?

A few guidelines that must be followed for a business to raise funds through a QIP are as follows. 

• According to the minimum shareholding requirements outlined in their listing agreement, the firm must be listed on a stock exchange.
   
• A minimum of 10% of the securities that the company issues must go to mutual funds or allottees.
   
• If the issue is up to Rs 2.5 billion in size, the company should make sure that there are at least two allottees. If the issue is larger than Rs 2.5 billion, the company should make sure that there are at least five allottees.
   
• A recipient cannot receive more than 50% of the total amount granted to them.
   
• Recipients cannot have any connection to those who advocate for the topic.
   

There are further restrictions that specify who is eligible to receive QIP securities offerings.

Rules for Issuing QIP

Now that you know QIP's meaning, let’s understand the rules for issuing them. SEBI has established regulations to oversee the QIP procedure and safeguard the interests of all parties concerned. The following are some essential guidelines.
 

1. Qualifications: A company must be listed for at least a year on a recognized stock exchange to be eligible to issue QIPs.
    
2. Issue Size: In a single fiscal year, a company may use QIPs to raise five times its net worth.
    
3. Minimum Allotment: Mutual funds must receive at least 10% of the issuance. The remaining portion may be distributed to other QIBs if mutual funds do not occupy the entire 10%.
    
4. Number of Allottees: For issues under ₹250 crores, there must be a minimum of two allottees, and for larger issues, there should be a minimum of five.
    
5. Maximum Allotment: No one may get more than 50% of the issue as an allottee.
    
6. Promoter Participation: Founders or significant owners of the company are not eligible to take part in the QIP.
    
7. Lock-in period: One year is the lock-in period for shares issued under QIP. It means that they cannot be sold for a year following allotment. 

These guidelines help in guaranteeing the equitable and responsible usage of QIPs. 

Who Can Apply for QIP?

Only Qualified Institutional Buyers (QIBs) are eligible to apply for and participate in QIPs. Let's take a closer look at these QIBs.
 

• Foreign Portfolio Investors (FPIs): Foreign entities registered with SEBI to invest in Indian securities.
   
• Insurance Companies: Any insurance provider may apply as long as it is registered with the Insurance Regulatory and Development Authority of India (IRDAI).
   
• Pension Funds: QIPs are available to both domestic and international pension funds.
   
• Mutual Funds: This category includes both international and domestic mutual funds that are SEBI-registered.
   
• Banks: Qualified international and Indian commercial banks are eligible to take part in QIPs.
   
• Alternative Investment Funds (AIFs): Venture capital funds, private equity funds, and hedge funds that are registered with SEBI are examples of Alternative Investment Funds (AIFs).
   
• Provident Funds: Funds that meet the minimum corpus requirement of ₹25 crores are eligible to take part.
   
• National Investment Fund: The Indian government plans to direct the money made by the disinvestment of Central Public Sector Enterprises.
   
• Systemically Important Non-Banking Financial Companies (NBFCs): NBFCs are qualified if their net worth exceeds ₹500 crores.
   
• National Investment Fund: The Indian government established the National Investment Fund.
   
• State Industrial Development Corporations: These governmental organizations support state-level industrial development.

What is qualified institutional placement refers to being exclusive to retail investors, high-net-worth individuals (HNIs), and even the company's promoters. This limitation exists because QIPs are regarded as sophisticated investment products, and these investors are thought to be knowledgeable enough to assess the risks.

Advantages of Qualified Institutional Placement

QIPs provide many advantages to companies wishing to generate funds.
 

• Simpler procedure: Compared to a public offering, the QIP procedure is less complicated and involves fewer regulatory obstacles.
   
• Cost-Effective: QIPs typically require less paperwork and regulatory approvals, resulting in cheaper expenses than public problems.
   
• Targeted Investors: Through QIPs, businesses can raise capital from knowledgeable institutional investors who are familiar with the industry.
   
• Minimal Dilution: Compared to a public offering, there is frequently less dilution of the interests of current shareholders because shares are issued to a limited number of investors.
   
• Pricing Flexibility: As long as the issue is priced above the floor price determined by SEBI's procedure, companies get some flexibility in pricing.
   
• Quick: IPOs are considerably faster. Usually, the entire procedure takes only a few weeks to finish.

Drawbacks of QIP

QIPs provide a lot of advantages, but they could also have some disadvantages.
 

• Restricted Investor Base: The prospective investor pool is limited because participation is restricted to qualified institutional buyers.
   
• Market Dependency: The state of the market as a whole can have a significant impact on a QIP's performance. It may be difficult to find buyers in a volatile market, even at the floor price.
   
• Possibility of Dilution: QIPs cause some dilution of the interests of current shareholders, though usually not to the same extent as in a public offering.
   
• Pricing Pressure: It can occasionally be challenging to draw investors due to the obligation to price at or above the floor price, particularly in volatile markets.
   
• Short-term Focus: According to some critics, QIPs may promote a concentration on short-term capital raising at the expense of long-term strategic planning.
   
• Regulatory Monitoring: QIPs are subject to regulatory scrutiny. Companies are required to comply with all SEBI regulations, although less than public offerings.
   
• Possibility for Misconduct: There have been concerns that certain companies may utilize QIPs. It is used for the gain of big owners or promoters rather than for actual financial needs.

Conclusion

Qualified Institutional Placement (QIP) is a popular method for Indian businesses to raise finance quickly and efficiently. QIPs offer a quicker and less expensive alternative to regular public offerings, allowing listed firms to issue securities directly to qualified institutional buyers. Despite its regulations and disadvantages, QIPs offer benefits such as speed, affordability, and access to knowledgeable investors. They are particularly beneficial during periods of rapid expansion or market fluctuations. However, it is essential for all participants to carefully consider the advantages of an ideal stock market app.