QIPs: Riding The Bull Run

During the last couple of years, fund raising in Indian capital markets has been an uphill task. All classes of investors, whether foreign, institutional or retail, have been shying away from the markets over tepid domestic sentiments and a rocky global environment. Talks of the anticipated tapering of QE stimulus by the US Fed has also wreaked havoc in the emerging markets including India, and we have seen a sudden gush of capital out of the markets.

The situation in the market has been so bad that we have seen just 18 IPOs hitting the market in almost 22 months since January 2012. At a time when pessimism shrouds the economy, a rather surprising, albeit interesting phenomenon has emerged on the Indian bourses. Since January 2013, India Inc. has garnered quite a hand-some amount of money through qualified institutional placements (QIPs). In just eight months till August this year, companies managed to raise Rs 12354 crore via 20 QIP issues, including Institutional Placement Programmes. In 2012 and 2011, this stood at just Rs 8964 crore and Rs 3459 crore respectively. 

Prima facie, this seems to be encouraging and could easily be hailed as a turnaround. But we at DSIJ decided to get at the root of this. What we found in our investigation does have some bearing on the performance of markets and companies as well. In 2013, QIPs have surpassed the figures of the last two years by a big margin. There are still three months left in which many big issues like Idea, SBI, etc. may come up, jacking the total figure to around Rs 17000-18000 crore. However, if we go by the sheer number of issues, then it is less than half compared to last year, when 47 issues hit the markets.

IPPs Have Made It Big 

In 2013, one key factor has helped the QIP market to bloom; SEBI’s minimum 25 per cent public shareholding norm, which all corporates (private or PSU) were obliged to follow by the given deadline of June 8, 2013. 

The regulator introduced the Institutional Placement Programme (IPP), through which any company can dilute its promoter shareholding upto 25 per cent without any restriction on price, which can be announced just one day prior to the issue. In fact, this was just a refined QIP mechanism that brought ease of private placement in the form of a public offer, as buyers under IPP were also QIBs (Qualified Institutional Buyers). It was particularly helpful for the companies, as there were no hassles involved in terms of paperwork, and price calculations and dilution could be done via institutional placement, that too with an extended timeframe of one-two days.

Due to the pressure of adhering to the SEBI directive, most companies opted to take the IPP route. Of the 20 companies that went in for private placement, 11 have opted for IPPs. In fact, just two IPP programmes – those of DLF and Adani Ports & Special Economic Zone – managed to garner Rs 2800 crore in the first half of 2013. 

Now, a vital question arises as to whether it is appropriate to consider this as a revival of QIPs or the institutional placement market, or if it was just the pressure to dilute the promoter shareholding that has helped the otherwise reeling capital markets. Nilesh Sathe, CEO, LIC Nomura Mutual Funds believes, “It is right that IPP has helped in reviving the institutional placement market, but going forward, it would be really difficult to say that the same tempo would be carried on the QIP front as fundamentally nothing has changed in the market. Some improvement has happened on the sentimental front, due to which investment will pick up slowly and steadily”. 

After the deadline for minimum public shareholding requirements elapsed on June 8, the amounts raised via IPPs and QIPs have waned and number of issues has also declined. While sums of Rs 2833 crore and Rs 1066 crore were raised in the months of May and June respectively, this plummeted to Rs 918 crore in July. The shocker came in the month of August, when no QIP activity was seen.

The Start Of A Bull Rally? 

Though it is true that IPPs have helped in reviving the institutional investment climate in the country, there were some QIPs that grabbed eyeballs during 2013. One of these issues was that of Axis Bank. This hit the market in January 2013, mopping up a whopping Rs 4726 crore via QIP and around another Rs 800 crore via preferential allottment. Observes Jagannadham Thunuguntla, Strategist & Head of Research, SMC Global Securities, “Fund-raising by Indian companies through QIPs has been fairly robust despite volatile market conditions. Axis Bank was a key issue, and one may see some improvement in the QIP market in the coming months due to increased fund raising from banks through this route”.

From the buzz in the market, this looks possible indeed. Idea Cellular, India’s fourth largest telecom operator, is reportedly going to raise Rs 3000 crore through a QIP. There are also many rumours afloat regarding QIPs of various banks and infrastructure companies in the coming months, as the valuations of these stocks look very attractive in the current scenario.

“We have to understand that nobody can time the market and institutional investors have their own ways of looking at the markets. They plan as per their own knowledge and take risks accordingly. A revival in the QIP space clearly shows some kind of movement, and this is a clear indication that the Indian economy has bottomed out. From here on, we can certainly see a bull rally as we had seen after the elections in 2009”, explains Gajendra Nagpal, market expert and CEO, Augment Financial Services.

A mantra to hold on to is that the markets are always forward looking. Despite all the negative factors like stalled projects, slowing down of economic growth, policy paralysis in the government, major scams hurting the economy, the threat of QE3 tapering in the US, high inflation, and CAD etc. for almost two-three years, today the markets are sitting pretty at striking distance from their all-time high levels. “This clearly shows that the markets have already discounted these factors and have started looking at the opportunities available. That is why institutions have now started making their moves and choosing their companies and sectors that can give them good returns. In this quest, we can see investment in the form of QIPs in the banks, infrastructure, metals and airlines spaces,” adds Nagpal.

Another point to consider is that the US QE tapering has been predicted for quite some time now, and the markets have already discounted the impact of this. So, the likelihood is strong that the Indian markets will not be shocked when the tapering actually happens. Foreign investors are well aware of this. “We have to understand that the market works on sentiment. FII investments are now showing optimism as no country other than the BRICS nations can give returns to the tune of over seven-eight per cent. The worst is over, and we will see more institutional investment coming into the Indian markets via various routes including QIPs”, remarks Sathe. 

There is already a fair amount of confidence in the air, with the markets discounting the positivity on the policy front and the bourses reaching near their all-time highs. On a fundamental basis too, India has an advantage of huge demand, a democratic set-up, and a robust financial and regulating infrastructure. Thus, in spite of the shortcomings on the policy and execution fronts, India presents a favourable investment destination to investors that will keep the QIP market afloat in the coming months.

“We used to raise funds to the tune of Rs 25000-30000 crore via QIPs in 2009 and 2010. The way the sentiment is today, this investment is slowly picking up and would certainly reach Rs 15000-18000 crore during the current year”, Nagpal maintains.

Promoters Are Also “Interested” In QIP Issue 

Though it is very clear from the legal perspective that promoters as well as entities related to promoters cannot participate in QIP issues as QIBs, it becomes very hard to put a finger definitively on instances of ’round tripping’ via Mauritius into the Indian markets. Market experts vehemently assert that there is a high possibility of promoters engaging in round tripping and investment into their own companies through fake entities via QIP issues. However, promoters today have become much more conscious while making such “investment” decisions as they have burnt their fingers in the past, Sathe opines.

According to one of the experts, though it is difficult to recognise such type of transactions as the credentials of investors are hard to determine, the presence of various institutional investors routed through Mauritius tells you what you need to know. Skimming through the list of institutions that have parked their money in some of the QIP issues in 2013, we came across names like Asia Investment Corporation (Mauritius), Indus Capital (Mauritius), Baytree Investments (Mauritius), etc., which points towards a robust interest of Mauritius-based institutions in Indian QIPs. 

“We have to understand that at the valuations at which stocks of various companies are trading, it certainly makes a valid case for an attractive investment avenue. Promoters know the intrinsic value of that stock and the value at which it is trading. Due to this investment opportunity, nobody can ensure that there is no goof-up in QIP issues in the form of round tripping by the promoters”, Nagpal says.