QIP Impact On Share Price: One of the major requirements for the effective and smooth running of the company is the availability of finance (i.e. liquidity).
In the past, there have been several instances when a lack of liquidity resulted in serious consequences for the company. There can be a significant decline in their share prices or situations can turn out to be even worse as their survival can be questioned.
Therefore, liquidity in a company and the company’s ability to raise money in a timely manner are quite crucial. There can be several reasons for a company to raise funds such as new product launches, acquisitions, expansions, etc.
There can be instances where even companies having healthy sales are not able to meet liquidity targets. If the companies don’t have the cash to operate, they are likely to struggle to be successful.
Liquidity is important to track the financial health of any business, to secure a loan, or to stay ahead in the game. There are many ways through which a company can raise finances such as IPO, FPO, OFS, QIP, etc.
While most of the fund-raising options have been in the market for quite some time, QIP is something that has been adopted by companies recently.
Therefore, this article will focus on understanding this fund-raising method in detail. We will also understand the QIP impact on the share price. Read on!
QIP – What Is It?
Qualified institutional placements, or QIP, is a recent form through which companies can raise capital in Indian markets.
This was introduced by SEBI in 2006 when they saw the growing dependence of Indian companies on foreign sources of funding through American Depository Receipts (ADRs) and Global Depositary Receipts (GDRs) to raise capital.
Increasing dependency on foreign funds through ADR and GDR was quite concerning for SEBI as such measures can be detrimental to the control of Indian companies.
Therefore, QIP was launched as a form of capital raising against FPO. FPOs can be time-consuming and this measure also has higher restrictions.
As the name dictates, QIP refers to a process that enables listed companies to raise money through the issue of securities to qualified institutional buyers (QIBs).
In the process, the company raises capital by issuing shares, fully or partly convertible debentures, or such securities (except warrants) which can be converted to equity shares.
Qualified institutional buyers (QIBs) are accredited investors which are defined by the market regulator. The limitation is because of the perception that such buyers include institutions having greater expertise and financial power.
Thus, such buyers can better evaluate and participate in capital markets, without many legal assurances of FPO.
Participants In QIP
Before understanding QIP impact on share price, let us quickly have a look at the participants in QIP.
SEBI guidelines have explicitly stated eligible participants of QIP. According to such guidelines, promoters and relatives of promoters are not eligible for QIP.
While there are several eligible participants, some of them include public financial institution (according to the provisions of section 4A of the Companies Act, 2013), scheduled commercial bank, SEBI-registered mutual fund, venture capital fund, or foreign venture capital investor which is registered with SEBI, insurance company registered with IRDA, etc.
QIP – How Will QIP Impact On Share Price?
QIP continues to be an attractive mode of raising capital for domestic companies. Such companies have all the reasons for choosing QIP rather than going for any alternate methods of fundraising.
Firstly, the time required for raising capital through the QIP method is considerably less in comparison to some options such as FPO or rights issues. Therefore, such companies can raise capital in a timely manner.
The companies are faced with lesser compliances and procedures while raising money with the help of QIP. Costs can be an issue for some companies.
Therefore, such companies tend to go through the QIP route as the costs of raising money are considerably lower in comparison to raising finances through ADRs or GDRs.
From investors’ standpoint, it is of utmost importance to know QIP impact on share price. Issuance of new shares to investors should take the stock price down as earnings will now be divided into a greater number of shares.
However, this also suggests that there is an increased interest among large investors in the company which increases the price of the share.
QIP impact on share price largely depends on the price at which the shares are issued in a QIP. If QIP shares are allotted at a big discount to their floor price, it hints that demand is not great. As a result, the stock price can fall.
QIP – How Will It Impact Investors?
After understanding QIP impact on share price, let us now understand how QIPs will impact the investors.
It has been seen that the investors tend to get benefited after the company successfully completes its QIP offer. This is because most investors follow smart money, which results in a significant increase in stock prices post-QIPs.
Most of the QIPs happen because companies want to improve their business capacities. Hence, investors hope for higher profits, which increases the stock price.
If a QIP ends up getting oversubscribed, it indicates that smart money has a higher conviction on the future potential of the company. As a result, higher interest from retail investors can also be seen.
However, for the existing shareholders there can be some difficulties too. This is because QIPs dilute the stake of existing shareholders.
Therefore, such placements are adopted by companies having significant promoter holding. Promoters having low stakes can be reluctant to take this route as further dilution can risk their management control.
Also Read: What Is A Good PE Ratio In Indian Stock Market?
To Sum Up
Qualified institutional placement is one of the favored sources to raise money in comparison to other methods of fundraising such as rights issues, FPOs, etc.
More often than not, the sole purpose for choosing the QIP route is to retire debt. There is no denying that QIPs are a cost-effective, faster, and easier method of raising finances for domestic companies.
The only restriction while determining the price for the issue under QIP is the restriction that has been laid down by SEBI regarding floor price. No other restriction is there.
Buyers and issuers can determine the issue prices on the basis of simple demand-supply functions. Therefore, in QIPs, third parties are not involved.
QIBs review the financial position of the issuer company. Apart from this, other factors including sound management and assets are also reviewed by qualified institutional buyers.
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