What it means
A listed company that needs more capital has several choices. It can borrow, it can offer new shares to the public, or it can sell shares to selected institutions.
A Qualified Institutional Placement is the third route, created by the Indian securities regulator for companies that are already listed on a stock exchange. In a QIP, the company sells securities only to qualified institutional buyers, which are large institutions such as mutual funds, insurers and banks.
Because these buyers are considered sophisticated, the regulator allows a simpler process with a placement document instead of a full prospectus. The issue can be completed in a matter of days, which lets the company act while market conditions are favourable, instead of waiting months for a public offering to be approved and marketed.
The price is not set freely. Rules require a floor price calculated from recent trading prices of the company's shares, and the regulator allows only a limited discount to that floor.
This stops companies from selling shares to favoured buyers at a price that hurts existing shareholders. The main attraction is speed and lower cost.
Banks and fund managers also like the approach, because they receive shares in a listed company with a clear disclosure document. Companies often use the money to repay debt, fund expansion or strengthen their balance sheet.
The cost to existing shareholders is dilution. New shares reduce each existing holder's percentage ownership, and earnings are spread over more shares.
Shareholders usually need to approve the issue in advance, and the rules set out how the new shares may be resold. A nuance is that the same letters stand for qualified improvement property in US tax law, which relates to interior improvements to commercial buildings and the speed at which their cost can be deducted.
The two meanings have nothing in common, so the surrounding text is the only guide. This entry covers the capital-raising meaning.
In practice
Real-world examples.
Example
A listed infrastructure company needs $100,000,000 to repay loans. It runs a placement to institutions and raises the money in three days. The funding replaces expensive short-term debt and lowers the interest bill.
Example
A mid-sized bank must raise its capital ratio to meet regulatory expectations. It places new shares with large funds and insurers. The additional capital allows it to continue growing its loan book.
Example
A pharmaceutical company wants to fund a new plant before a competitor does. It uses a placement to raise money quickly from institutions already familiar with its business. A public offering would have taken months.
Formula
Calculation
Net proceeds = number of new shares x issue price - issue costs
Dilution = new shares / (existing shares + new shares)
Suppose a listed company has 45,000,000 shares in issue and sells 5,000,000 new shares at $20 each through a placement. Gross proceeds = 5,000,000 x 20 = $100,000,000. Issue costs of 2% are 100,000,000 x 0.02 = $2,000,000, so net proceeds are $98,000,000. Dilution = 5,000,000 / (45,000,000 + 5,000,000) = 10%, meaning an existing holder who owned 1% now owns 0.9%.Case study
Seen in the real world.
Eastwind Power is an illustrative, fictional listed energy company that needed $80,000,000 to complete a new plant. The board wanted to avoid a public offering, which would have taken months and exposed the company to market swings before the money arrived.
The company launched a placement to institutions. It calculated the floor price from the average trading price over the previous two weeks and offered a small discount to attract buyers. Within three days it sold 4,000,000 shares at $20 each, raising $80,000,000 before costs.
The illustrative drawback was that the issue diluted existing shareholders by about 8%, since the company already had 46,000,000 shares and 4,000,000 / 50,000,000 = 8%. The CFO explained to shareholders that the plant would raise earnings enough to offset the dilution within two years. She also published a short schedule showing how the proceeds would be spent, so that investors could track progress against the plan each quarter.
Watch out
Common mistakes.
- Assuming a placement is open to the general public, when it is restricted to qualified institutional buyers.
- Ignoring dilution, which reduces existing shareholders' ownership and earnings per share unless growth makes up for it.
- Confusing the capital-raising meaning of QIP with qualified improvement property in US tax law.
Questions
People also ask.
Who can invest in a QIP?
Only qualified institutional buyers such as mutual funds, insurers and banks, not ordinary retail investors.
Why is a QIP faster than a public offering?
The regulator allows a simpler placement document and limited marketing, which shortens the timetable considerably.
Does a QIP need shareholder approval?
Generally yes, shareholders approve the plan to raise capital in advance, within the limits set by the rules.
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