QIPs to flood the markets

Anybody reading newspapers these days should be coming across this daily. Its QIP or Qualified Institutional Placement. The pace has accelerated that the drought hit and debt ridden companies are lining up QIP s like anything. Some do one and there are some companies who do 2 in just 2 months. The place is becoming so hot that more and more companies are looking at this route for raising some quick money - mostly to pay off their debts.

QIP refers to the private placement of shares or so called securities that are convertible into stocks. The company does this QIP to mostly institutions like banks, insurance firms, FIIs, mutual funds. Both domestic and international players can take part in this private placement. QIP is considered to be the fastest, easiest and the cheapest route to raise capital, the price may not be at a premium to the CMP.

All kind of companies are coming up with QIPs. We had Unitech having 2 placements, Indiabulls Real Estate making a placement. The companies like Gammon India, Parsvnath, JSW, GMR, Ansal properties, NCC, Omaxe, Anant Raj industries, HDIL, Purvankra..... are planning to come up with QIPs of their own. Estimates show that more than 1 billion USD has already been raised by the companies and the requirement is so huge going forward. In fact, GMR alone had originally planned to raise a billion USD from this route.

QIPs are usually done by companies where the promoters' holding is high. Various promoters are looking at trimming their holding by a significant 10% to as much as 30% or 40%. Although there are many ways to raise money, the speed is the factor supporting the QIP route. The entire money raising process can be done in as soon as a week. The added advantage is that SEBI approval may be required. Also, using this route huge amounts of money can be collected which may not be possible in other routes.

The other usual ways for a listed company to raise capital is through preferential issue of shares, rights issue or by listing in foreign bourses. Most of these options are time taking process with preferential rights issues taking almost 3 months. QIPs were introduces in 2006 by SEBI when the Indian companies were in huge demand for money for expansion. It was in 2007 that 41 companies collected a whopping 23, 338 crore through this route. However, during 2008, the QIP activity came to stand still due to the pricing rules of SEBI.

SEBI had mandated that the price of shares that were sold through QIPs should be either the average of the past six months' trading price or the average during the previous two weeks. This prevented all the companies from taking this route. However, SEBI had eased these rules later helping the issuers to price their issue more in relation to the current market price.

To contact the equity analyst on this story: Arun Gopalan in Chennai at Arun@hbjcapital.com