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Why is India Inc taking the QIP route? SMC Cap explains
Published on Wed, Jun 10, 2009 at 15:43 | Source : CNBC-TV18 Updated at Wed, Jun 10, 2009 at 17:26

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SMC Capitals has come out with a report on qualified institutional placements in India. Jagannadham T, Equity Head, SMC Capitals, said QIPs have found market favour as it is a quick way to raise capital. "In case of an IPO, follow-on public offering),or any other fund raising mode, it would take about four-five months, whereas in the case of a QIP, everything can be wrapped up in a matter of four-five days. There is no lock-in as in the case of a preferential allotment. Also, no Sebi approval is required for the same." Also see: India Inc queues up to raise Rs 30K cr via QIPs this fiscal Here is a verbatim transcript of the exclusive interview with Jagannadham T on CNBC-TV18. Also see the accompanying video. Q: Tell us the key points that you have in this document? A: We have tracked the markets of IPOs (Initial Public Offering), rights issues, and QIPs (Qualified Institutional Placement) in the first five months of 2008 versus first five months of 2009. Out of the first five months, three months - January-February-March - of 2008 were much higher than first three months of 2009. This was the time when 2008 had Reliance Power IPO and State Bank ofIndia's rights issue. Around April-May 2008, the bearish trend was setting in and the fund raising had dipped, whereas in April-May 2009 the recovery has started. April-May 2009 has five times more fund raising than the same period last year. The lines have crossed and April and May 2009 featured QIPs and not IPOs or rights issues. .

Q: There is a whole bunch of companies applying for QIPs. Although the first twothree especially in the realty space did well in terms of QIPs, do you think a fatigue factor has set in. Is there resistance to buying future QIPs? A: The success of QIP was essentially because of its very limited regulatory restrictions and very quick turnaround that can happen. In case of an IPO, FPO (follow-on offering), or any other fund raising mode, it would take about four-five months whereas in the case of a QIP everything can be wrapped up in a matter of four-five days. That is the main reason why QIPs have such a robust performance in the last 45-50 days. Even in the last 45-50 days, even the capital market went up by 90%. Naturally, corporates and investors were looking what is the easiest and the quick way to cash in upon the secondary market revival. So, the obvious answer was QIP because naturally everything can be wrapped in very short span of time because Sebi's approval is not required there. Post the success of Unitech and Indiabulls' QIPs others followed suit. Q: I know QIPs are equity instruments but are they in the nature of debt instruments. Is that why institutions prefer them, which means there is some kind of a hidden buyback. Three months ago, they could have bought these stocks for worth the paper they were written on and they didn't buy it. Now, they all want to rush in. What is it that we are missing out here that creates the interest for this QIP? A: The regulatory ease is one. Second, if somebody tries to go and buy in the open market, the problem will be impact cost. For example, Unitech's QIP was for about USD 325 million. So if somebody goes out and buys in the open market, it may end up running up the cost and ending up as an impact cost. Naturally, they have preferred a QIP route where they will get a guaranteed allotment. In case of QIPs, when compared to a preferential allotment, there is no lock-in. One more question that may come is why companies and investors are choosing the QIP route, why not a preferential allotment? It's because in case of preferential allotment, there is a one-year lock-in. In case of a preferential allotment, the price at which the preferential allotment has to be done is the average of six months or two weeks whichever is higher. Whereas in the case of a QIP, the pricing is the average of the last two weeks.