Definition: QIP or Qualified Institutional Placement is largely a fund raising tool for the listed companies.
Description: QIP is a process which was introduced by SEBI so as to enable the listed companies to raise finance through the issue of securities to qualified institutional buyers (QIBs).
Earlier, since raising finance in the domestic market involved a lot of complications, Indian companies used to raise funds from the overseas markets. So to prevent this, SEBI introduced this process so as to make the raising of funds easier in the domestic market.
Is QIP good or bad?
In terms of efficiency I believe that QIP is basically standing on its own feet. It is an efficient product, it works for issuers, and it works for investors.
KEY Points About QIP
- Qualified institutional placements (QIPS) are a way to issue shares to the public without going through standard regulatory compliance.
- QIPs instead follow a looser set of regulations but where allottees are more highly regulated.
- The practice is mostly used in India and other Southeast Asian countries.
- QIPs were created to avoid dependency on foreign resources for raising capital.
- Qualified institutional buyers (QIBs) are the only entities allowed to purchase QIPs.
A qualified institutional placement (QIP) was initially a designation of a securities issue given by the Securities and Exchange Board of India (SEBI). The QIP allows an Indian-listed company to raise capital from domestic markets without the need to submit any pre-issue filings to market regulators. The SEBI limits companies to only raising money through issuing securities.
Working of QIP
The SEBI put forth the guidelines for this unique avenue of Indian financing on May 8, 2006. The primary reason for developing QIPs was to keep India from depending too much on foreign capital to fund its economic growth.
QIPs are helpful for a few reasons. Their use saves time as the issuance of QIPs and the access to capital is far quicker than through a follow-on public offer (FPO). The speed is because QIPs have far fewer legal rules and regulations to follow, making them much more cost-efficient. Further, there are fewer legal fees and there is no cost of listing overseas.
To be allowed to raise capital through a QIP, a firm must be listed on a stock exchange along with the minimum shareholding requirements as specified in their listing agreement. Also, the company must issue at least 10% of its issued securities to mutual funds or allottees.
Regulations also exist for the number of allottees on a QIP, depending on the specific factors within an issue. Additionally, no single allottee is allowed to own more than 50% of the total debt issue. Furthermore, allottees must not be related in any way to promoters of the issue. Several more regulations dictate who may or may not receive QIP securities issues.
Qualified Institutional Placements (QIPs) and Qualified Institutional Buyers (QIBs)
The only parties eligible to purchase QIPs are qualified institutional buyers (QIBs), which are accredited investors, as defined by whatever securities and exchange governing body preside over it. This limitation is due to the perception that QIBs are institutions with expertise and financial power that allows them to evaluate and participate in capital markets, at that level, without the legal assurances of a follow-on public offer (FPO).