The Hindu Business Line : QIPs demystified

If news reports are anything to go by, 67 Indian listed companies are proposing to raise about Rs 25,000 crore through the qualified institutions placement (QIP) route. PTC India, a power trading company, Unitech Realty and Suzlon Energy recently raised Rs 500 crore, Rs 160 crore and Rs 210 crore, respectively, through this route.

It is therefore pertinent to understand the key issues and the regulatory regime governing QIPs, which have gained popularity particularly amongst the capital-intensive infrastructure and real-estate companies, which were hit by the global economic slump.

What are they?

Qualified Institutional placements or QIPs, were introduced in mid-2006. Simply put, QIPs are private placements or issuances of certain specified securities by Indian listed companies to qualified institutional buyers in accordance with the provisions of SEBI guidelines.

Who invests?

Indian companies that are listed on stock exchanges having nationwide terminals — the BSE and NSE — may opt for raising capital through the QIP route . The reason why SEBI singles out such bidders as eligible investors is primarily because these entities have a large risk appetite, possess the general expertise and have the experience to make an informed decision. However, if such an investor is related directly/indirectly to a promoter of the issuer company, then such an entity loses its eligibility to participate in a QIP offering.

How many bidders?

In case the issuer company is raising funds less than or equal to Rs 250 crore, then allotment to at least two bidders has been mandated. If the issue size is above Rs 250 crore, then allotment to at least five bidders is compulsory.

Further, a single bidder cannot be allotted more than 50 per cent of the issue size, and those that are under common control or belong to the same group are to be considered as a single allottee. The issuer companies also need to bear in mind that under no circumstance can the aggregate issue size in one financial year exceed five times their pre-issue networth.

Pricing

Keeping in mind the dismal capital market conditions, SEBI, through the August 2008 amendment, liberalised the pricing conditions for QIPs reducing the period of reckoning to an average of two weeks’ stock price, prior to the relevant date, against the earlier requirement of taking the higher of the previous six months’ or 15 days’ average price.

Placement document

In the case of QIPs, the issuer company has to prepare a “placement document” containing all the relevant and material disclosures. Additionally, the specified securities issued under the QIP route do not have the same lock-in restrictions that are placed on securities issued under the preferential issue route. It can be converted to equity in a relatively longer period of 60 months than the preferential route which allows only for a maximum of 18 months for conversion.

FII participation

The aggregate shareholding of FIIs is capped at 24 per cent of the total issued share capital of a company. However, if the issuer company intends to make allotments to FIIs which may breach this cap of 24 per cent, this has to be approved by a special resolution at a shareholder meeting along with prior approval of the Reserve Bank of India.

The takeover code

Depending on the percentage of the shares issued to an allottee, disclosures or other obligations under the Takeover Code may be triggered. For instance, an entity that acquires shares or voting rights exceeding 5 per cent of the total share capital of the company under the QIP route shall need to disclose its shareholding to the target company and the stock exchanges.

The QIP route does provide a lucrative alternative to IPO for cash-strapped companies, as it is cost-effective, faster and mandates relatively lesser compliance.

(The authors are members of the law firm Nishith Desai Associates. The views are personal.)

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