What are QIPs and what advantages do they offer over ADRs/GDRs?
QIPs are essentially structured as follow on offerings to only qualified institutional buyers (QIBs). In India QIBs include foreign institutional investors (FIIs), mutual funds, insurance companies, venture capital funds and banks. The QIP route of issuing equity or other instruments has four distinct advantages over the GDR route:
1) GDRs are essentially offered to FIIs, whereas QIPs are offered to a wider segment of investors as described above,
2) in case of GDR issuances, the offer document is required to be vetted and cleared by the relevant stock exchange such as Luxembourg. With a QIP issuance, there is no requirement of prior vetting or regulatory clearance of the placement document, which results in reduced time to market,
3) investors prefer the QIP route since they are directly alloted equity shares of the company and not derivative instruments such as depository receipts which involve conversion time and conversion costs and
4) the issuer company continues to be listed on the same exchanges on which it is currently listed and hence does not take on the compliance obligations of a new stock exchange.
Which companies have already used the QIP product to raise capital?
Kalpataru Power was the second company that raised capital through this route and the first issue of a significant size. It raised Rs3.5 billion ($74.6 million) through this route (as against approximately Rs4 million raised in the first issuance). Kotak Investment Banking was the global coordinator and sole book runner for the Kalpataru Power QIP.
How was the response? What kind of investors participated?
The transaction was oversubscribed beyond the $75 million issue size that was approved by the company's shareholders. Investors included venture capital funds, FIIs, mutual funds and insurance companies.
What is your outlook on capital raising for the next few months of fiscal 2006-07 ie. until March 31?
There was some slowdown in primary issuances post May this year and as a result several companies, both listed as well as unlisted, are waiting in the wings to access the capital markets. If the overall market sentiment stays in a positive zone, there should be considerable capital raising this fiscal year.
In the secondary market appetite seems to be highest for large cap stocks. However, issuances are mostly planned by mid-caps. What is your assessment of the appetite for new issues?
With a relatively less liquid stock, the issuance itself becomes an important liquidity event where institutional investors can hope to take reasonably sizable positions on the story. Therefore, in good equity stories there is no problem in enticing investor interest, especially since the allocation is on a discretionary and not proportionate basis.
There is obviously a concern about the exit in low liquidity counters, but again, the primary QIP issuance itself can act as a catalyst to better liquidity, if it is well distributed. The QIP route is superior to enhance stock liquidity, since equity shares are issued and traded on the Indian exchanges, without any lock-in provision.
Do you think alternative exchanges like the Singapore Exchange, the London Alternative Investment Market (AIM) and Dubai International Financial Exchange (DIFX) are gaining currency over traditional exchanges such as Luxembourg in the minds of Indian issuers?
We have handled several GDR issuances such as the $170 million offering of Cipla, $70 million offering of Apollo Hospitals, $60 million offering of Himatsingka Siede and $100 million offering of Kotak Mahindra Bank. Most of these transactions were listed on the Luxembourg Stock Exchange, which remains a popular exchange for Indian issuers.
The new breed of international stock exchanges such as Singapore, AIM and Dubai have been on the radar screen in the recent past and there are situations in which such exchanges have offered certain specific benefits. For example shipping companies are seen to be well traded in Singapore or companies having a Middle East presence could find favour for investors in Dubai.
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