QIPs face roadblock as markets turn volatile

QIPs face roadblock as markets turn volatile

Rajesh Bhayani & Abhineet Kumar / Mumbai February 15, 2010, 0:55 IST


Enthusiasm for Qualified Institutional Placements (QIPs) to raise equity from institutional investors has slowed down.

This, market experts say, is because stock markets have turned volatile and funds flow from foreign institutional investors (FIIs) has turned negative. At least 15 companies are waiting for the market to improve to raise money through QIPs. But, unless prices turn positive and rise above two-week average, they will not be able to raise capital.

QIP is a capital raising tool preferred by listed companies in India to quickly raise funds with minimum documentation. Through QIPs, companies issue equity shares, fully and partly convertible debentures, or any securities other than warrants which are convertible to equity shares to qualified institutional buyers.

According to stock exchange announcements, 90 companies are waiting to raise about Rs 70,000 crore through this tool. “QIPs do not work in declining or volatile markets,” said Prithvi Haldea, chairman and managing director of Prime Database, Delhi-bases capital markets data provider.

“The primary capital market will be choppy in the short term. We have to price in volatility to ensure success of issuances. Investors are slowly becoming risk averse,” said S Ramesh, chief operating officer, Kotak Investment Banking.

A QIP’s pricing is based on the latest two-week average price of a stock. So, in a falling market, investors shy away from an issue when the prevailing market price comes below the two-week average.

Companies have raised about Rs 41,000 crore in the current financial year till January, when the Sensex rose 68 per cent to 16357 at the end of the month, from 9708 at the end of the last financial year.

“Appetite of investors has come down, which is affecting the QIP issues,” said Pankaj Jaju, executive director, investment banking at Enam Securities.

The fund flow from FIIs turned negative in January, for the first time in the current financial year. There was net outflow of Rs 1,100 crore FII money in the month, against inflow of average Rs 10,100 crore in the last nine months. FIIs have been the largest subscribers to the QIP issues.

FII sentiment has also been hit since the US President spoke about plans to ban proprietary trading of US banks last month. Proprietary trading has been the mainstay of these banks and such a move could hurt their investing capabilities. There is also rising concern of governments globally withdrawing stimulus packages over a period of time. This has affected the stock markets in India, along with other markets worldwide.