Monday, April 09, 2007

The QIP deep dive

As early as January, 2006 a report by the SEBI-committee raised concern over the growing number of Indian listed companies tapping funds through the GDR/FCCB routes, on account of its time and cost effectiveness adversely impacting the depth of the domestic markets. While the number of follow-on public issues in domestic markets during 2001-02 to 2004-05 period rose from zero to six, the number of GDRs/FCCBs from listed Indian companies grew by three-fold from three to 42, the report had said.

On the basis of this report, SEBI came out with a solution in May, 2006 in the form of Qualified Institutional Placements or QIPs, which were significantly less cumbersome than IPO filings. As per the guidelines, issuers will have to allocate a minimum of 10 per cent of such placements to mutual funds. For each QIPs, there shall be at least two allottees for an issue size of up to Rs 250 crore and at least five allottees for an issue size in excess of Rs 250 crore. "Further, no single allottee shall be allotted in excess of 50 per cent of the issue size," the guidelines stipulated. The securities issued through QIPs will be equity shares or any securities other than warrants that could be converted into (or exchangeable) with equity shares, SEBI said in a circular.

The placements of these specified securities could be made only to Qualified Institutional Buyers (QIBs), while a minimum of 10 per cent in each such offer should be allotted to mutual funds, the regulator said. Promoters or those related to the issuers are barred from participating in such issues. Owing to these advantages, companies took to it happily.

But now since the market has been in a bearish mode for the past few weeks, the floor price stipulation (being the higher of the six-month weekly average or 15-day weekly average of the quoted prices) in the QIP guidelines have begun to adversely affect the issuances. The floor prices based on the SEBI formula are now higher than their current market prices. The floor price is again applicable from the date of the enabling resolution by the board. Of late, prospective issuers are finding their floor prices higher than their current prices. While SEBI doesn’t allow the QIP issuer the flexibility to revise the price downwards, investors wouldn’t be willing to come in at a price higher than the prevailing market price. Catch 22 of sorts.
Will SEBI relax its floor price norms for QIPs or let it lose flavor ? Keep watching this space.

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