In this blog, you are going to read a detailed article on Qualified Institutional Placement(QIP).
What Is A Qualified Institutional Placement?
In essence, a qualified institutional placement (QIP) enables listed companies to raise capital without the need to submit formal documentation to market regulators. It’s common in countries like India and others in Southeast Asia. The rule was created by the Securities and Exchange Board of India (SEBI) to stop companies from becoming unduly dependent on outside financial sources.
Key Takeaways
- It is possible to issue shares to the public through qualified institutional placements (QIPS) without having to go through the usual regulatory compliance process.
- Conversely, QIPs have less stringent rules, but the allottees are subject to stricter regulations.
- The majority of the countries in Southeast Asia, including India, employ this approach.
- QIPs were developed to help raise finance without relying on outside sources.
- The only entities authorized to purchase QIPs are qualified institutional buyers or QIps.
Benefits of QIP:
Access to a Larger Investor Base: QIP allows businesses to reach a larger group of possible investors, which includes medium-sized and small businesses (SMEs).
For companies with limited access to traditional financing markets, this is especially beneficial.
Fast and Cost-Effective Fundraising: Compared to other equity funding techniques like IPOs, QIPs can be carried out more quickly and affordably. Because of the simplified procedure, businesses can raise money more effectively and without having to comply with the stringent standards of an IPO.
Flexibility in Fundraising: Companies can raise funds more easily and choose when to place their investment thanks to QIPs.
It gives businesses the freedom to choose the scope and cost of the product, adjusting it to fit their own financial requirements and market dynamics.
Control over Shareholding Structure: QIPs allow companies to keep control over their shareholding structure, in contrast to IPOs, where shares are exchanged openly on stock markets.
This can be beneficial for companies that wish to avoid the expenses and legal requirements of going public or keep strategic control.
Cons of QIP
Investor Expectations at High Risk: Institutional investors in QIPs, or QIBs, are frequently high-risk capitalists.
Because of the nature of the placement, they can ask for larger returns on their investment. To guarantee a win-win agreement, businesses should carefully weigh the possible financial ramifications and negotiate terms.
Suitability for Bigger, More Established Businesses: QIPs are generally better suited for bigger businesses with solid financial performance and track records.
It could be difficult for smaller or less seasoned companies to draw institutional investors using this strategy.
The Procedure for a Qualified Institutional Placement (QIP)
The Securities and Exchange Board of India (SEBI) first designated a securities issue as a qualified institutional placement (QIP).
With the QIP, a domestic market raises cash for an Indian-listed firm without requiring any pre-issue paperwork to be made to market regulators.
Companies are restricted by SEBI to only raising capital through the issuance of securities.
On May 8, 2006, the SEBI released the instructions for this special Indian finance channel. The principal rationale behind the creation of QIPs was to prevent India from becoming overly reliant on foreign funding to support its economic expansion.
Guidelines for Approving an Institution for Placement (QIP)
For a company to be eligible to raise funds through a QIP, it must meet the minimum shareholding requirements outlined in its listing agreement and be listed on a stock market.
A minimum of 10% of the issued securities by the corporation must also be distributed to mutual funds or allottees.
Regulations also govern how many people can be assigned to a QIP, based on the particulars of each case. Furthermore, no one allottee may possess more than 50% of the entire debt problem.
Moreover, recipients must not have any connection to those who advocate for the problem. There are further restrictions that specify who is eligible to receive QIP securities offerings.
Buyers and Placements of Qualified Institutional Buyers (QIBs and QIPs, respectively)
Only qualified institutional buyers (QIBs), or accredited investors as specified by the securities and exchange regulatory body that oversees it, are permitted to purchase QIPs.
The belief that QIBs are organizations with the knowledge and resources to assess and engage in capital markets at that level without the legal guarantees of a follow-on public offer (FPO) is the cause of this restriction.
Thanks for reading our blog about Qualified Institutional Placement(QIP).
Also Read