Qualified Institutional Placements

The job of an investment banker is to help their clients raise funds from the open market. There are certain common instruments such as shares and debentures which are used to raise funds all over the world. However, the procedure which is followed while issuing such instruments can often carry across countries.

There are some countries that have certain special processed which can be used to raise capital. One such process is called Qualified Institutional Placement (QIP), which is often used by companies in South Asian nations such as India to raise capital. Needless to say that since Qualified Institutional Placement (QIP) is used frequently in India, it also contributes a lot to the income which investment bankers in India earn.

What is a QIP?

Qualified Institutional Placement (QIP) is a method of issuing equity and debt securities. It is closely related to the private placement. This is because, under Qualified Institutional Placement (QIP), companies in India can sell their shares to certain pre-defined organizations without offering them for sale to the public at large. This procedure can be used by companies that are already listed on the stock exchanges to raise money without inducing too much volatility in the share prices.

Who can Issue a QIP?

In order to issue a Qualified Institutional Placement (QIP), a company has to first be listed on the stock exchange of that country. Since the company is already registered with the regulatory bodies, they are often not asked to submit any additional documentation. If the Qualified Institutional Placement (QIP) route was not available, then the company would have to go through a rigorous process before they were allowed to raise funds.

Who can Subscribe to a QIP?

The name Qualified Institutional Placement (QIP) itself suggests that the issue is only meant for qualified institutions. The concept of qualified institutions is similar to the concept of accredited investors. This means that qualified institutions also have to be registered with the regulatory bodies of that country. Generally, qualified institutions do not include high net, worth individuals. Instead, they only include large funds such as mutual funds, pension funds, insurance companies, etc.

The important part is that many regulators place restrictions regarding who can subscribe to the Qualified Institutional Placement (QIP). This is because, in the absence of such regulations, there is always a chance for manipulation to take place. Hence, the rules generally exclude the promoter as well as related parties from participating in the Qualified Institutional Placement (QIP) process.

Retail investors are also not allowed to participate in this process since it may be significantly risky, and retail investors may not have the ability to bear such huge risks.

Also, in most parts of the world, companies are required to issue the shares to at least two investors. This means that Qualified Institutional Placement (QIP) cannot take place if the shares are being issued to a single investor. This is where the services of investment banks are often required to ensure that the shares can be sold to the highest bidder. Since there is no public auction, the depth of the investment banker's network is an important determinant of price.

How are QIPs Priced?

Qualified Institutional Placement (QIP) are procedures to sell shares and debentures which are held by the common public. Hence, if a company can sell them at a lower price to a " qualified investor," it would undermine the financial interests of the existing shareholders. This is the reason why regulatory bodies determine the minimum price at which Qualified Institutional Placement (QIP) can be priced.

The idea is to take a long period of time i.e., six months or so. The everyday high and low during an extended period of time, like six months, are averaged out. The price so derived is often kept as the base price. This is because prices may be manipulated in the short term. However, it is quite unlikely that prices will be manipulated for an extended period of time, like six months. Investment bankers play an important role in this price discovery process.

Advantages of a Qualified Institutional Placement (QIP)

There are several advantages to having a Qualified Institutional Placement (QIP). Some of them have been listed below:

  1. Cheaper: Firstly, the entire process of Qualified Institutional Placement (QIP) is quite cheap. The transaction costs involved with a public issue are quite large. A Qualified Institutional Placement (QIP) can be done at about one third, the cost of a standard public issue. This is the reason why many companies prefer to raise money via Qualified Institutional Placement (QIP).

  2. Faster: Also, Qualified Institutional Placements (QIP) are subject to significantly less paperwork and regulations. Thus, money can be raised at a faster rate using QIPs. This is important since some time companies need fast cash to take advantage of an investment opportunity. This is where QIPs help. There are several investment banks that can help raise money in less than a week.

  3. Big Stakes: Qualified institutional placements (QIP) are also the preferred way for selling large stakes. This is because if the buyers start buying large quantities of shares in the open market, they often end up raising the price of those shares. It has been observed that the shares purchased last are at least 20% more expensive than the shares were initially purchased. QIPs help to transfer ownership without creating additional volatility in the system.

  4. Trust: Lastly, QIPs signal that the institutions have trust in the company being traded. If qualified institutions who have all the information regarding the underlying company trust it to make a purchase, then it reinforces the confidence of the retail investor.

To sum it up, qualified institutional placements are a viable alternative to private placements and public issues in many South Asian countries. It is an effective, cheaper, and faster way to raise money.

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