Introduction

There might be times when a company is in need of urgent funds to finance its new project or to pay off debts.

But what are the options available to a company to raise funds in a short period and that too at a minimum cost?

Follow-on Public Offer (FPO) might look like the best alternative but it comes with too much documentation work and requires permission from different authorities before raising funds. This is not a feasible option if the funds are needed urgently.

To those unaware of FPO, it is a process by which an already listed company issues further shares to the public. It is done to either raise more funds or dilute the ownership of current shareholders.

Qualified Institutional Placement or QIP is another way by which a company can raise funds to meet its capital requirements. But what exactly is QIP and how does it work?

What is a Qualified Institutional Placement QIP?

A Qualified Institutional Placement (QIP) is a method by which an already listed company can raise funds without going through a rigorous process of submitting legal documents to market regulators.

It is similar to a private placement.

This method was introduced by SEBI on May 8, 2006, to avoid the dependency of Indian companies on foreign capital for their capital requirements.

Using QIP, a listed company can issue debentures or shares to the Qualified Institutional Buyers (QIB) to raise funds in the domestic market.

This method saves a lot of time as the company doesn’t have to go through the legal process of the regulators and costs which are incurred during the process of raising funds are also eliminated.

Who are Qualified Institutional Buyers (QIB)?

QIBs are those institutions or large investors who are eligible to invest in QIPs. 

Companies are granted permission to raise funds from QIBs without legal formalities due to the fact that QIBs have the expertise and financial resources to evaluate a company’s QIP without the assistance of market regulators.

Retail investors are not allowed to participate in QIPs.

QIBs include:

• National Investment Funds 
• Insurance Companies
• Mutual Funds 
• Provident Funds 
• Venture Capital
• Public Financial Institutions
• Commercial banks 

Rules for issuing QIP

• The promoters or anyone related to promoters of the company cannot participate in the QIP.

• A single participant cannot own more than 50% of the securities under QIP.

• A minimum of 10% of the QIP issue should be allotted to mutual funds.

• Only those companies that are listed on recognized stock exchanges can raise funds via QIP.

• If the issue size is more than 250 crores, there should be at least 5 buyers.

Real-life examples of QIPs

• AU Small Finance bank raised 2000 cr via QIPs in August 2022.

• Shriram Transport Finance raised 1999 cr via qualified institutional placement of equity shares on June 7, 2021.

• Godrej Properties raised 3,750 cr through QIP in 2021.

• Telecom company VI planned to raise 7000 cr via QIP in 2021.

Conclusion 

Raising funds via QIP is a good sign for retail investors as this reflects the institution’s trust in the company’s business. 

The main purpose behind the introduction of QIPs by SEBI was to reduce the dependence of Indian companies on foreign resources.

SEBI has been able to accomplish this goal to a great extent but it still has a far way to go.

There has been a lot of fundraising happening via QIP but given the size of the Indian market, a lot of work is yet to be done.