FPOs and QIPs - All You Need to Know

The difference between an FPO and a QIP is quite subtle. For example, if the company is already listed, then the company can again raise funds from the public through a follow-on public offer (FPO). Alternatively, companies also have the option of raising funds through private placement of shares to large institutional investors. Such institutional investors are also known as Qualified Institutional Buyers (QIB) and the process of placing shares is qualified institutional placement (QIP).

Basic rules underlying an FPO

• One cannot issue FPO before getting listed in the stock exchange. That means; an IPOlisting must precede the FPO offering
• Majority portion of FPO has to be fixed for QIB allottees in the stock market
• Total funds that can be raised through QIPs must not exceed 5-times the Net Worth of the company in the previous fiscal.

Merits of QIPs in India

QIP is the process of raising capital via the issue of equity shares, fully and partly convertible debentures or any securities other than warrants. QIBs are the institutional market participants who have expertise and the ability to access and evaluate such issues and include  professional institutional investors like banks, MFs, FIIs, insurers etc.

Fund raising in India, in the past, would typically happen via the use of ADRs or GDRs but this made the Indian companies dependent on foreign capital. In order to reduce dependency of Indian companies on foreign capital, SEBI introduced QIP process which enabled Indian companies to raise capital from a select group of investors in India. In fact, the QIP has been price accretive for the stock prices as was seen recently in the cases of Bajaj Finance, Axis Bank and JK Lakshmi Cement. QIP can also be useful in sending the right signals to the market. For example, when a QIP gets oversubscribed, it is a sign that the smart money has conviction on the company’s future potential. This creates interest in individual investors.

Who would qualify as QIBs

A Qualified Institutional Placement is a capital raising tool for a listed company to issue equity shares, fully and partly convertible debentures, or other securities. However, unlike in an IPO or an FPO, only institutions or qualified institutional buyers can participate in a QIP. Let us look at institutions that qualify as QIBs.

• Mutual funds, venture fund, AIFs and foreign VCs
• Foreign portfolio investors (FPIs) other than Category III FPIs
• Public financial institution as defined in section 4A of the Companies Act, 1956
• Scheduled commercial bank and state industrial development corporation
• Multilateral and bilateral development financial institution
• Insurance company registered with the IRDA
• Provident fund or a pension fund with minimum corpus of Rs.25 crore
• National Investment Funds
• Insurance funds set up and managed by the armed forces

How QIPs differ from FPOs?

Here are some key areas of differences between a FPO and a QIP

• FPO mechanism is used by the promoters to raise capital for expansion or diversification. QIPs are used by listed entities to raise capital solely from qualified institutional buyers (QIBs).
• FPOs tend to dilute the capital with the monies being raised from QIBs and from retail and HNIs. QIPs also dilute the capital but the monies are only raised from institutions.
• In a FPO, the payment is done through the ASBA process (payment on allotment only). In the case of QIP, the deal is between the QIB and the issuer and the payment is made internally.
• In FPO, the issuer decides the floor price band and bids below this band are rejected. In a QIP, the issuer decides the floor price for allocation; and it is normally at a discount to the market price.

Conclusion

Qualified Institutional Placements (QIPs) offer a swift and efficient way for companies to raise capital, benefiting from favourable market conditions. However, they come with risks like shareholder dilution, pricing challenges, and regulatory compliance. Adhering to SEBI guidelines and maintaining transparent communication is crucial for success. Despite the risks, QIPs can be a powerful tool for companies when used judiciously.