When businesses want to expand, they need capital. The stock market serves as an important medium for raising capital by sharing ownership of business in return for capital. Once the company gets listed on the stock exchange there are numerous ways to raise additional capital.
- It could do a rights issue and offer more shares for a certain price to its existing shareholders.
- The company could also do a follow on Public offer or an FPO which brings in more new shareholders by allotting fresh shares to them.
- Preferential allotment to a select group of entities or investors like promoters etc., subject of course to a shareholder approval.
- By doing Qualified Institutional Placement.
Qualified Institutional Placement (QIP) is a capital-raising tool, primarily used in India and other parts of southern Asia, whereby a listed company can issue equity shares, fully and partly convertible debentures, or any securities other than warrants which are convertible to equity shares to a Qualified Institutional Buyer (QIB).
Apart from preferential allotment, this is the only other speedy method of private placement whereby a listed company can issue shares or convertible securities to select group of persons. QIP scores over other methods because the issuing firm does not have to undergo elaborate procedural requirements to raise this capital.
Qualified Institutional placement (QIP) occurs when the securities and Exchange Board of India allows an Indian company to issue securities in India without providing preliminary filings regarding the issue. QIP’s are similar to private placements in the united states. Indian companies that are listed on an Indian stock Exchange are generally eligible to offer QIP’s only to Qualified Institutional Buyers (QIB’s).
Some limitations exist. For example, an issuer can raise no more than five times its net worth via QIP’s in a year. It must also prepare a placement document containing relevant material disclosures, and a merchant banker must manage each QIP.
QIP’s help Indian companies raise capital in India, and in turn they help make Indian markets more competitive and efficient. They have been around since about 2006; before that, Indian companies often tapped foreign markets via American depositary receipts (ADR’s) for capital.
The main advantages of a company Issuing QIP’s include..,
- Cost Efficiency
- The regulatory oversight of SEBI is far more relaxed when money is raised via the QIP route. There is no long wait for document approval by a SEBI dealing officer as is the case when a company does an IPO, FPO or rights issue. The whole process can complete in 4-5 days, provided of course that the issuer company manages to get willing QIB’s buyers.
- IPO/Rights/FPO are an expensive affair. A large team of bankers, auditors, lawyers have to be involved and the approval could take 4-5 months if not more. Further, the fees to be paid to the exchange are far lesser in case of a QIP.