There are broadly two ways companies can raise cash from the capital markets:
1. Debt – Taking a loan from the market. Companies intending to raise cash through this route could borrow money from banks/ financial institutions/ high networth individuals/ from public through company’s own fixed deposit schemes etc. When taking this route the company pays an agreed rate of return on the loan taken
2. Equity – When you take a loan you are obviously expected to repay it (I am not sure though, if this is entirely understood in today’s scenario). Some companies may decide that instead of taking a loan, they could raise the cash from willing investors by making them partners in the business. The investors hence get a portion of the company’s business in exchange for the cash they give, and get their share of returns through the profits/ losses the company makes.
Both these routes have their own merits and demerits and this is the crux of financial planning in today’s corporations.
Companies intending to raise money through equity have various ways of doing so. Few of the popular means are:
2. Rights Issue – Existing share holders get the right to invest more . In case some shareholders do not exercise their right, then their stake will reduce as other investors may decide to go ahead and invest more cash
3. Private Placement/ QIP – A QIP is a Qualified Institutional Placement. Instead of trying to raise cash from public at large, companies could use this route to get cash from a few large investors called QIBs (Qualified Institutional Buyers). QIBs are generally large institutional investors who have the expertise to evaluate market offerings and invest large amounts. SEBI, our market regulator has given elaborate directions on who are eligible to qualify as a QIB.
Why is the QIP route hot today?
With UPA firmly sitting at the center, the markets have started moving as if there is no tomorrow(which is not entirely unjustifiable). There is renewed hope in the economy. People who were sitting at the sidelines want to jump into action as of yesterday. Companies want to speed up their expansion plans and move swiftly.
QIP is an instrument which could fit perfectly well in this situation because of the following reasons:
Timing – An IPO takes time. You first need to file a prospectus, get it approved, appoint merchant bankers, do market shows and finally raise cash. It could at least take a few months. Who knows what the market sentiment is going to be then? No one wants to take a risk
Cost – A QIP is cost effective. You directly contact the institutional investors and convince them to loosen their purse strings. Following an IPO route would on an average cost 7% of the funds raised
Ease of exit – If an institutional successful-investors/”title=”investor ” >investor invests through an IPO there is a minimum lock in period involved. They cannot sell their shares during this period even if they find the price extremely attractive. A private placement gives the institutional investors an opportunity to invest in non-locking shares. So, they can make their exit anytime. This is extremely important to these large investors especially in today’s scenario of volatile markets. Who does not want to take up an opportunity to make a quick buck.
No wonder companies are queing up to raise money through this route. Unitech raised Rs. 1620 crores, India Bulls raised Rs. 2600 crores and a total of about a billion dollars have been raised through this route in the last two months. More companies have annouced their intentions to raise another billion dollars in the next few weeks/ months.
Make hay while the sun shines!!!