Qualified Institutional Placement (QIP): Meaning and Advantages

The Indian stock market are seeing many new IPOs entering the market to attract investors and raise capital. However, for companies who do not want to go through the IPO route, SEBI also provides the option of raising capital through QIPs (Qualified Institutional Placement). So what is QIP, and how do you apply for it? Get answers to these questions and more in this blog.

What Is a Qualified Institutional Placement (QIP)?

A Qualified Institutional Placement (QIP) is a method publicly listed companies use to raise funds quickly and efficiently by selling shares or other securities directly to large investors known as Qualified Institutional Buyers (QIBs). 

The Securities and Exchange Board of India (SEBI) introduced this process in 2006 to help companies avoid the lengthy and costly procedures associated with IPO by offering securities directly to institutional investors.

QIPs offer investors an opportunity to buy into promising companies with the potential for growth. For companies, it's a fast-track method to secure funds without diluting too much ownership. 

Step-by-Step Process for Issuing Qualified Institutional Placement 

The procedure to raise capital through QIP is listed below.

• Ensure the company meets SEBI’s criteria.

• Get the board’s approval for the QIP

• Create a document with details about the issue.

• Submit the document to SEBI for approval.

• Promote the QIP to institutional investors.

• Receive bids from institutional investors.

• Decide on the allocation of shares based on bids and issue them.

Regulations for a Qualified Institutional Placement (QIP)

A few regulations to be implemented for raising capital through Qualified Institutional Placement (QIP) are listed below,

• The company must be listed on a recognised stock exchange in India for at least one year and must meet the minimum public shareholding requirements.

• At least 10% of the shares must be allotted to a mutual fund or other Qualified Institutional Buyers (QIBs) if no mutual fund participates.

• Allottee Requirements - 

  • For issues up to Rs. 250 crore, there must be at least 2 allottees.

  • For issues above Rs. 250 crore, there must be at least 5 allottees.

  • No single investor can get more than 50% of the total issue.

  • Allottees cannot be related to the company’s promoters.

• The issue price is based on the two-week average share price before the issue.

• SEBI Guidelines - 

  • The issue size cannot exceed 25% of the company’s paid-up capital in a financial year.

  • The minimum QIP size is Rs. 100 crore.

  • The maximum amount raised cannot exceed Rs. 500 crore or 5 times the company's net worth.

  • Shares issued through QIPs have a lock-in period of one year.

  • Companies must provide detailed information to SEBI and stock exchanges about the QIP, including issue size, pricing, and allocation details.

Who can apply in QIP?

The eligible entities who can participate in QIPs are listed below.

• Mutual Funds that pool money from many investors to purchase securities.

• Insurance Companies providing financial protection or coverage to individuals and businesses.

• Pension Funds set up to collect, manage, and invest money for retirement income.

• Foreign Institutional Investors (FIIs) investing in the Indian stock market.

• Banks and Financial Institutions providing financial services, including lending and investing.

• Venture Capital Funds investing in startups and small businesses with long-term growth potential.

• Alternate Investment Funds (AIFs) investing in various asset classes, other than traditional stock and bond markets.

What Are the Advantages of QIPs?

QIPs have become a preferable option to raise capital for many companies due to their several advantages. Some of these advantages include,

• Faster Fundraising - QIPs are quicker than IPOs, allowing companies to raise capital efficiently.

• Lower Costs - They involve fewer regulatory costs and less paperwork compared to IPOs.

• Targeted Investors - Companies can raise funds from institutional investors who are often more stable and committed.

• Flexibility - There’s more flexibility in pricing and allocation, as the process is less rigid than an IPO.

• No Public Float Requirement - Unlike IPOs, QIPs don’t require companies to offer shares to the general public.

• No Impact on Market Price - The issue price is based on historical averages, reducing the impact on the stock’s market price.

What are the Disadvantages of QIPs?

While QIPs offer a more straightforward and quicker way for companies to access capital, a few limitations also have to be considered. Some of these disadvantages include,

• Dilution of Ownership - Issuing new shares can dilute the ownership of existing shareholders.

• Limited to Institutional Investors - Only qualified institutional buyers can participate, excluding retail investors.

• Lock-in Period - Shares issued through QIPs have a mandatory lock-in period of one year, restricting liquidity.

• Price Pressure - Although based on historical averages, the issuance can still affect the share price temporarily.

• Regulatory Compliance - Companies must adhere to SEBI regulations, which can be complex and time-consuming.

• Control Issues - Large institutional investors may seek to influence company decisions due to their significant stake.

Conclusion

Qualified Institutional Placements (QIPs) are a streamlined way for publicly listed companies in India to raise capital by selling shares directly to large, sophisticated investors known as Qualified Institutional Buyers (QIBs). This method is regulated by SEBI and ensures transparency and efficiency, helping companies raise capital efficiently and cost-effectively. It is a valuable tool for companies to quickly and effectively secure funding while maintaining compliance with regulatory standards.