Financial sector has changed to a marked extent from the way it operates, its constituent participants, coupling and decoupling of economies, rules and regulations, and its impact on the economy, which is inseparable in today's time.
Earlier financial arena was considered as separate universe and the people involved were considered some kind of superhuman or aliens. The main reason behind was the lack of information. At that time retail investors or simply say layman were unaware of the financial markets, products, its modus operandi, its uses, benefits etc. Because of lack of awareness, financial market participants played with markets by making fool of people.
Over the years, plethora of changes happened in the world economy, which changed the outlook of financial market entirely. With adoption of Liberalization, Privatization and Globalization policy by India in 1991, India reached an altogether a very different level of growth, which even wouldn't got affected by the worst financial crisis of millenium, whereas its counterparts i.e., developed nations just had a dip into the crisis.
Several new policies and amendments to the existing acts took place, in order to make the financial sector easy to understand and transparent for common man. With infusion of more information into the market, financial market in today's time can be compared to McDonald's where even a kid knows which burger to eat and what are its constituents.
Presently, even a kid is speaking the language of investment so do their parents since former is an outcome of the impact on the latter. Right from the TV commercial to print media and from hoardings to sponsoring of talent shows and reality shows on TV, helped the financial sector in reaching the brain of every living person on thsi earth.
One can think at this stage of time is that, its a good thing that everyone is getting aware of the environment around him. I totally agree with such thinking, but there is always an other side of coin, which nobody wants to see.
Benefits:
1. More information about financial products, increase the market for financial sector.
2. Better utilization of funds because of more faster routing of savings to investments.
3. Increased growth and GDP, since funds from surplus sector (household savings) will easily get tanslocated to the deficit area (production and manufacturing).
4. Increased market depth which leads to decreased transaction costs, which will further attract more investors, thereby turning into a vicious circle of investment.
5. Development of market, to give better returns to investors.
The above mentioned benefits are sufficient enough to support the doctrine of impact of increased financial information on the economy. But there is other side as well, which could be:
Non-benefits:
1. Every Tom, Dick & Harry, now considers himself to be investment manager, which gives negative signals in the market.
2. Uninformed investors create misunderstandings in the market by creating havoc.
3. Market will become more emotional than logical and rational.
4. Half knowledge is always harmful, both for the informant and the informee.
5. Returns by mere speculation is addictive situation, which will force participants (investors) to choose illegal paths of earning high returns and it will further increase the incidence of frauds in the economy.
6. Though the market depth will increase, but its just a buoyant situation and more of like a bubble and the clear indication is that when market falls, this bubble squeezed out and when market starts rising, it will again inflate.
7. Such emotional rallies in the market is very confusing for the needy investors and other participants which give market a wrong direction thereby degrading the returns of all.
The above benefits of non-benefits of increased financial market awareness, outweigh each other on one or the other aspect. As laureates declared this decade as "decade of liquidity", I rather declare it as "decade of weak fundamentals", leading to more nervousness of the market.
Wednesday, August 11, 2010
Thursday, June 17, 2010
De-regulation of Saving Account interest rates
Banking sector had went through plethora of changes so far since British era. Nationalization, privatization and de-regulations enhanced the effectiveness of Indian banks. Banks as we know are the growth engine of economy, without which we can't even think of survival in current scenario.
Three important events which happened in this fiscal pertaining to banks are very useful in boosting bank's operational efficiencies. These events are namely, introduction of base lending rates, daily calculation of saving rate and finally the deregulation of saving interest rate.
Out of above mentioned measures, deregulation of saving interest rates is going to be highly beneficial for banks. Currently, bank's saving account interest rate is 3.5%, but after deregulation it can be increased to some better level. Let's look at the various scenarios generated out of deregulation:
1. Depositors or bank account holders will be benefited by getting good interest income on their savings.
2. They will have more options of choosing their banks, on the basis of the interest rate being paid by them.
3. Since banking sector is perfect market, so automatically all the deregulated saving rates comes to an average which will be beneficial for the banks.
4. The most important benefit for banks is better asset-liability management. By analysing their asset potentials i.e., interest income from lent loans, they can manage their liabilities efficiently.
5. Daily calculation of the bank savings rate will complement this deregulation practices and motivate other people who currently don't have any bank account, to open up the same. This will help in fund mobilization from savings sector to the productive centers of the economy.
6. In highly competitive world, this method will make banking operations little flexible and give them a room to develop further and launch innovative products in order to meet the market's requirement.
7. This measure will also help banks in achieving financial inclusion objectives, if not directly then indirectly for sure.
RBI should look into the matter from various aspects and take this measure as soon as possible to complement all the above mentioned three measures which are inter-linked to each other in some or other manner.
Three important events which happened in this fiscal pertaining to banks are very useful in boosting bank's operational efficiencies. These events are namely, introduction of base lending rates, daily calculation of saving rate and finally the deregulation of saving interest rate.
Out of above mentioned measures, deregulation of saving interest rates is going to be highly beneficial for banks. Currently, bank's saving account interest rate is 3.5%, but after deregulation it can be increased to some better level. Let's look at the various scenarios generated out of deregulation:
1. Depositors or bank account holders will be benefited by getting good interest income on their savings.
2. They will have more options of choosing their banks, on the basis of the interest rate being paid by them.
3. Since banking sector is perfect market, so automatically all the deregulated saving rates comes to an average which will be beneficial for the banks.
4. The most important benefit for banks is better asset-liability management. By analysing their asset potentials i.e., interest income from lent loans, they can manage their liabilities efficiently.
5. Daily calculation of the bank savings rate will complement this deregulation practices and motivate other people who currently don't have any bank account, to open up the same. This will help in fund mobilization from savings sector to the productive centers of the economy.
6. In highly competitive world, this method will make banking operations little flexible and give them a room to develop further and launch innovative products in order to meet the market's requirement.
7. This measure will also help banks in achieving financial inclusion objectives, if not directly then indirectly for sure.
RBI should look into the matter from various aspects and take this measure as soon as possible to complement all the above mentioned three measures which are inter-linked to each other in some or other manner.
Sunday, June 13, 2010
25% public shareholding, creates 100% worries
Current decision on public shareholding provisioning by Government left each and every entity of the market into great confusion and worries. Though the motive behind such amendment is to increase market depth and best price discovery methods in a company, but the hidden truth behind such move is to gather money in order to reduce the India's debt position which is nearing 60-80% of GDP - a sign for concern especially when its a developing economy.
Through this move, government will be able to collect Rs. 1.5-2 Lakh Crore from nearly 200 companies in India who are not meeting 25% public shareholding pattern, out of which 30 are public sector undertakings including ONGC, BHEL etc. From 3G auction Government added Rs. 1.05 Lakh Crore in its kitty but still it hasn't met its revenue generation target for this planning session.
Now look at the various concerns of market participants on this rule.
1. Cash rich corporates worried that what will they do with the money raised from FPOs as they don't such business plan ahead. They don't want to dilute the ownership.
2. Government has to amend the SEBI's ACT chapter XII of Issue of Capital and Disclosure Requirement Regulations, because company can raise funds in one fiscal year once i.e., one time in 12 months. So, the company's which recently raised capital from the market how will they be allowed to raise further before the amendment.
3. Retail investor's won't be much benefitted as they look for capital gains and preferred IPOs where they can meet their investment objectives. But now, only FPOs will come into market and this will affect their objectives.
4. Imagine, when 200 companies came up with their FPOs, investors have to borrow money from banks and financial institutions, due to this demand upsurge, interest rates will rise which again is the area of concern as it will increase inflation further.
5. Due to increased interest rates and inflation rate, liquidity will be squeezed out of the system leading to crowding out of investments from the country. This will hamper the growth prospects and objectives of the country.
6. Cyclical businesses need funds as per their business cycles, and if they have to raise funds before arrival of their investment period, where they will park their funds.
7. Reduced pie of promoters in overall shareholding, no doubt will somewhat control the corporate governance issues, but this will demotivate new entrant as well. This will halt entrepreneurial activities in the country which are of utmost importance for growth and employment generation.
Keeping all the above points in mind, the picture is not so clear and attractive behind these new provisioning and the only thing it will do is to create volatility in the market which is not good for capital market of any country.
Through this move, government will be able to collect Rs. 1.5-2 Lakh Crore from nearly 200 companies in India who are not meeting 25% public shareholding pattern, out of which 30 are public sector undertakings including ONGC, BHEL etc. From 3G auction Government added Rs. 1.05 Lakh Crore in its kitty but still it hasn't met its revenue generation target for this planning session.
Now look at the various concerns of market participants on this rule.
1. Cash rich corporates worried that what will they do with the money raised from FPOs as they don't such business plan ahead. They don't want to dilute the ownership.
2. Government has to amend the SEBI's ACT chapter XII of Issue of Capital and Disclosure Requirement Regulations, because company can raise funds in one fiscal year once i.e., one time in 12 months. So, the company's which recently raised capital from the market how will they be allowed to raise further before the amendment.
3. Retail investor's won't be much benefitted as they look for capital gains and preferred IPOs where they can meet their investment objectives. But now, only FPOs will come into market and this will affect their objectives.
4. Imagine, when 200 companies came up with their FPOs, investors have to borrow money from banks and financial institutions, due to this demand upsurge, interest rates will rise which again is the area of concern as it will increase inflation further.
5. Due to increased interest rates and inflation rate, liquidity will be squeezed out of the system leading to crowding out of investments from the country. This will hamper the growth prospects and objectives of the country.
6. Cyclical businesses need funds as per their business cycles, and if they have to raise funds before arrival of their investment period, where they will park their funds.
7. Reduced pie of promoters in overall shareholding, no doubt will somewhat control the corporate governance issues, but this will demotivate new entrant as well. This will halt entrepreneurial activities in the country which are of utmost importance for growth and employment generation.
Keeping all the above points in mind, the picture is not so clear and attractive behind these new provisioning and the only thing it will do is to create volatility in the market which is not good for capital market of any country.
Saturday, June 12, 2010
Public shareholding kept at 25%, Why?
Government of India took this initiative of increasing public shareholding in companies to 25% to meet their several objectives.
1. First of all 25% provision is standard across several developed economies, that's why Govt. want to implement same provision in India.
2. The main hidden motive apart from increasing market depth and better corporate governance, behind this initiative is that, Govt. want to raise money to decrease it's debt ratio which is nearing 80%. After 3G Auction Govt. is able to raise Rs. 1.05 Lakh Crore but still they are lagging behind in achieving the revenue target of this fiscal.
3. In high inflationary situation and during fiscal and monetary exit measures, govt. has to keep in mind that the strategy shouldn't worsen the situation. If this percentage would have been higher it will result in, exit of MNCs from India, make India less attractive to foreign entities, Increase in interest rates in the market as more people will borrow from banks and market in order to share purchase. When interest rates rises, it will further increase the inflation which is bad for any economy. In nut shell, it will lead to crowding out of the investments from India and hamper the liquidity position.
By keeping all the above mentioned features in mind, Govt. proposed to make public shareholding to 25%.
1. First of all 25% provision is standard across several developed economies, that's why Govt. want to implement same provision in India.
2. The main hidden motive apart from increasing market depth and better corporate governance, behind this initiative is that, Govt. want to raise money to decrease it's debt ratio which is nearing 80%. After 3G Auction Govt. is able to raise Rs. 1.05 Lakh Crore but still they are lagging behind in achieving the revenue target of this fiscal.
3. In high inflationary situation and during fiscal and monetary exit measures, govt. has to keep in mind that the strategy shouldn't worsen the situation. If this percentage would have been higher it will result in, exit of MNCs from India, make India less attractive to foreign entities, Increase in interest rates in the market as more people will borrow from banks and market in order to share purchase. When interest rates rises, it will further increase the inflation which is bad for any economy. In nut shell, it will lead to crowding out of the investments from India and hamper the liquidity position.
By keeping all the above mentioned features in mind, Govt. proposed to make public shareholding to 25%.
Wednesday, June 9, 2010
QIP versus Preferential Allotment
Funds, cash or money, different names but with one objective i.e., to keep organization perpetually growing while meeting all the needs effectively and efficiently at the right time. In today’s competitive world, growth is one aspect which is crucial for the survival of any entity and organizations took two ways for doing so namely, organic growth and inorganic growth. To fulfill these growth objectives organization need funds and these funds can be raised through various modes.
Companies raises funds through various methods which includes public issues, rights issues and private placement. These methods are different for unlisted companies and different for listed companies. Unlisted companies follow the routes of IPOs and private placement and listed companies uses FPOs, preferential issues, rights issue and QIPs to raise funds. Above listed sources of finance, has their pros and cons attached to it in terms of dilution of ownership, costs involved in raising the funds, time involved etc. So, different companies uses different mode in order to raise funds while keeping their strategic objectives intact.
Listed companies have more options of fund raising in comparison to unlisted companies. Listed companies can raise funds by further public offering, preferential allotment, rights issue and qualified institutional placements.
Keeping focus on private placement method of fund raising, I want to differentiate between preferential allotment of shares and qualified institutional placements as both the method are for listed companies. So, interesting question arises here is that why do companies prefer qualified institutional placements instead of preferential allotment?
Private placement of shares or of convertible securities by a listed company to selected group of investors is called preferential allotment. In simple terms, its an issue of stock available only to designated buyers. A listed company going for preferential allotments has to comply with the requirements contained in Chapter XIII of SEBI (DIP – Disclosure & Investor Protection) guidelines pertaining to preferential allotment in SEBI (DIP) guidelines which interalia include pricing, disclosures in notice etc., in addition to the requirements specified in the Companies Act.
Whereas, QIP can be defined as the method of raising money/funds from the market by issuing equity shares, fully and partly convertible debentures or any securities excluding warrants to a Qualified Institutional Buyers by any listed company in India.
Both the above mentioned modes of private fund raising tool by listed companies are cost effective and time savers but still they differ in some aspects. The differentiator reasons help companies in choosing among the two of them. The success of QIP was essentially because of limited regulatory restrictions and very quick turnaround that can happen.
Following are the differentiating reasons which made QIP issues a success story:
• Unlike preferential allotment, QIPs don’t have any lock-in period which is very attractive feature for the investors. Investors prefer QIPs so that they can exit the investment anytime, if anything goes wrong (market crashes, companies rating dropped etc.). But this is not so with preferential allotment, as there is one year lock-in period for the promoters to ensure that the promoters or main persons who are controlling the company, shall continue to hold some minimum percentage in the company after the public issue.
• Regulatory norms in case of fund raising through QIP is minimal in comparison to preferential allotment. In the latter case company has to comply with DIP Guidelines by SEBI.
• Pricing of preferential allotment has been done by taking the average of six months or two weeks – whichever is higher. Whereas in the case of a QIP, the pricing is the average of the last two weeks. This measure helps companies in fixing their issue price at much better rate in comparison to preferential allotment.
Above mentioned reasons helps us in understanding the biased behavior of companies towards QIP instead of preferential allotment as the former compliments companies in their goals achievement which is to raise low cost funds in less time. Preferential allotment, on the other hand, restricts companies in certain areas like pricing of the issues and lock-in period feature which is unattractive for investors.
Companies raises funds through various methods which includes public issues, rights issues and private placement. These methods are different for unlisted companies and different for listed companies. Unlisted companies follow the routes of IPOs and private placement and listed companies uses FPOs, preferential issues, rights issue and QIPs to raise funds. Above listed sources of finance, has their pros and cons attached to it in terms of dilution of ownership, costs involved in raising the funds, time involved etc. So, different companies uses different mode in order to raise funds while keeping their strategic objectives intact.
Listed companies have more options of fund raising in comparison to unlisted companies. Listed companies can raise funds by further public offering, preferential allotment, rights issue and qualified institutional placements.
Keeping focus on private placement method of fund raising, I want to differentiate between preferential allotment of shares and qualified institutional placements as both the method are for listed companies. So, interesting question arises here is that why do companies prefer qualified institutional placements instead of preferential allotment?
Private placement of shares or of convertible securities by a listed company to selected group of investors is called preferential allotment. In simple terms, its an issue of stock available only to designated buyers. A listed company going for preferential allotments has to comply with the requirements contained in Chapter XIII of SEBI (DIP – Disclosure & Investor Protection) guidelines pertaining to preferential allotment in SEBI (DIP) guidelines which interalia include pricing, disclosures in notice etc., in addition to the requirements specified in the Companies Act.
Whereas, QIP can be defined as the method of raising money/funds from the market by issuing equity shares, fully and partly convertible debentures or any securities excluding warrants to a Qualified Institutional Buyers by any listed company in India.
Both the above mentioned modes of private fund raising tool by listed companies are cost effective and time savers but still they differ in some aspects. The differentiator reasons help companies in choosing among the two of them. The success of QIP was essentially because of limited regulatory restrictions and very quick turnaround that can happen.
Following are the differentiating reasons which made QIP issues a success story:
• Unlike preferential allotment, QIPs don’t have any lock-in period which is very attractive feature for the investors. Investors prefer QIPs so that they can exit the investment anytime, if anything goes wrong (market crashes, companies rating dropped etc.). But this is not so with preferential allotment, as there is one year lock-in period for the promoters to ensure that the promoters or main persons who are controlling the company, shall continue to hold some minimum percentage in the company after the public issue.
• Regulatory norms in case of fund raising through QIP is minimal in comparison to preferential allotment. In the latter case company has to comply with DIP Guidelines by SEBI.
• Pricing of preferential allotment has been done by taking the average of six months or two weeks – whichever is higher. Whereas in the case of a QIP, the pricing is the average of the last two weeks. This measure helps companies in fixing their issue price at much better rate in comparison to preferential allotment.
Above mentioned reasons helps us in understanding the biased behavior of companies towards QIP instead of preferential allotment as the former compliments companies in their goals achievement which is to raise low cost funds in less time. Preferential allotment, on the other hand, restricts companies in certain areas like pricing of the issues and lock-in period feature which is unattractive for investors.
Tuesday, June 8, 2010
An insights into Qualified Institutional Placement
Qualified Institutional Placements
Abstract:
Post financial crisis scenario, Indian stock markets were facing boom of Qualified Institution Placements (QIPs) mainly by real estate giants like Unitech & India bulls infrastructure. News of issuance of QIP made a permanent place in all the dailies every day. QIP is a cost-effective and time saving fund raising tool for any organization, so every one of them looking to get a pie of it. But the motive behind this paper is to find out that what influences the companies to race for QIPs in current scenario and why wouldn’t they be following Initial Public Offer (IPO) route as they used to do previously? This paper throws some light on the regulations involved in issuing QIP, their benefits and drawbacks while answering the above question.
Introduction:
The oxygen of any business is funds or cash which keeps it going indefinitely as per the Going Concern Concept of GAAP principles. There is plethora of sources from where an organization can raise funds for accomplishing activities of expansion, growth and diversification. These funds could be raised either from domestic market or foreign market. Raising funds from domestic market involves the options of IPO for equity shares, preference shares and/or debentures; bank loan and finally QIP. Whereas raising funds from foreign market involves the route of ADR/GDR/FCCB. All these modes are highly differentiated in respect to the ownership dilution, cost of issue, time of issue, increased liability, more regulations etc.
But the major focus of this paper is on QIP (which is one of the method of raising money from domestic markets) so let’s discuss it. “QIP can be simply defined as the method of raising money/funds from the market by issuing equity shares, fully and partly convertible debentures or any securities excluding warrants to a Qualified Institutional Buyers (QIBs) by any listed company in India”. It is the cost-effective and time saving tool for raising money in comparison to IPO or bank loans.
Now the question arises why QIP? In FY 2004-05 the total inflow of ADR/GDR funds was around $2.5 billion which is projected to $ 4.5 billion in current fiscal. From this data we can analyze that how rapidly Indian firms are moving abroad for raising money and the only reason behind this is presence less regulations as compared to SEBI regulations. In order to maintain liquidity in Indian market and motivate corporates to raise money here, SEBI launched QIP scheme in 2006 with less regulations and flexibility. Over a month since April, the money raised through QIPs has already exceeded the Rs. 3586 Crore raised in the whole of 2008. Also 114 companies are in QIP queue to raise $ 18 billion from the market which includes Sterlite Industries, Reliance Infrastructure, Hindalco Industries ($500 million), Axis Bank ($ 71.4 million), Adani enterprises (Rs. 15000 million), Educomp Solutions Ltd. (Rs. 6067 million) to name a few.
QIP rules & regulations:
Under QIP Scheme of SEBI, company who wishes to raise fund through this mode should be listed on an exchange and needs to issue minimum of 10% of the securities to mutual funds. Moreover, it is mandatory for the company to ensure that there are at least two allottees for the size of issue of Rs. 250 Crore and at least five if the size is more than Rs. 250 Crore.
These instruments are basically meant for Qualified Institutional Buyers (QIBs) who are institutional investors, perceived to possess in evaluating and investing in the capital market. These includes, public financial institutions, scheduled commercial banks, mutual funds, FIIs, provident funds, pension funds, venture capital funds, insurance companies, etc.
Though these regulations were made quite flexible and easy way for the companies to raise their funds but due to fluctuating and cyclical pattern of crest & trough (boom & fall) of world’s economy, affected the market heavily and lowered the investors’ expectations. To remain operational companies need fund and under such liquidity crunch it’s very hard to influence investors to invest in their company.
Boom & crunch in QIP issue:
In Pre-Lehman fall era, QIP was not so famous in the capital markets instead companies took the IPO route since investors are optimistic about the market and ready to take risks. At that time, investors emotions were high because of rapid and large growth in country’s as well as world’s economy. India’s GDP before Lehman fall led financial crisis i.e. around 2007 & early 2008 was at 9.3% approximately and similarly stock exchanges (economic barometers) were doing extremely good and were at their highest level in their history, for instance, BSE Sensex crossed 21000 marks and NSE’s Nifty crossed 6000 points in January 2008.
But this situation flipped after the great financial tsunami which was driven by the bankruptcy of Lehman brothers and subsequently all its associated companies directly or indirectly. After this crisis, liquidity crunch happened all across the globe (thanks to globalization) and markets plunged drastically.
Due to great efforts put in by RBI & SEBI for revival of the economy by creating liquidity in the market, investors starts to get stable and started trusting companies’ fundamentals. But this period of stability doesn’t remained for much time and ‘Satyam’s Fraud Saga’ happened which surprised the every investor and was an example of lack of corporate governance and one of the biggest frauds that investors fraternity could think of. All above events are sufficient enough to shake the investor’s emotions due to which they become risk averse and start doubting every company in the market, which ultimately leads to failure of many IPOs like the Gujarat State Petroleum Corporation’s IPO for raising $ 1 billion, got delayed by two months. Thought this is not the sole reason for IPO failures but it could be one of them.
After this atrocious situation companies were left with an option to raise money from foreign markets. Then, SEBI introduced the fastest capital raising tool on May 2006 called Qualified Institutional Placement (QIP) to prevent listed companies in India from developing an excessive dependence on foreign capital like ADR/GDR. These companies were allowed to raise capital from its domestic markets without the need to submit any pre-issue filling to the regulator.
The main logic behind using this tool was that it is easy to convince couple of big investors like QIBs than the whole public which involves a huge cost as well for advertisements etc. If we look at the previous trends most of real estate companies came up with the QIPs (because real estate sector was one which was one of the cause of crisis (subprime mortgage crisis)) e.g., Unitech raised $ 325 million through QIP and was the successful one in doing that which was followed by Shobha developers who raised Rs. 526.89 Crores, Nagarjuna Constructions came up with QIP of Rs. 550 Crore etc. Following this trend other non real estate companies also joined in like Suzlon energy came up with Rs. 2000 Crore, Shree Renuka Sugars with QIP of $ 105 million then Max India and Bank of Rajasthan were quite a few with target of Rs. 400 Crore and Rs. 250 Crore respectively. Various companies raises funds through QIP for various reasons e.g., Shree Renuka raised funds to expand the company’s refining capacity, Tech Mahindra raised it to retire its debt, Bank of Rajasthan raised to meet Basel-II adequacy norms etc. Various Companies raises funds to meet their diversified needs based on their nature of business and kind of operations they are in.
After few successful QIP like that of Unitech & Indiabulls real estate, every second company started issuing QIP to raise money either to meet their working capital needs or to retire their debt, these issues started declining. The major reason behind their decline is the method of pricing of these issues by SEBI. According to SEBI, the price of issues should not less than the higher of the following:
(i) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date;
(ii) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the two weeks preceding the relevant date.
Due to this fixed formula for QIP pricing, if suddenly market emotions falls like we have seen during post budget session in July 2009, the stock prices began to fall. And, in that condition instead of going for high valued QIP (historical average prices of weekly high and weekly low); investor will choose to buy from the market at low prices. For example, companies which have managed to raise the money from the market using this tool had to downsize their issues, like, shobha developers which could raise only $ 111 million against $ 300 million planned initially.
Implications of QIP:
Because of lack of lock-in period QIBs are likely to exit from issue whenever market shows upward trend and as majority of investors in India trade only on speculative basis, they also start selling their ownership rights which could affects the company’s image.
Another issue related with QIP and could be dangerous for issuing company is dilution of the ownership. QIPs allow an investor to buy majority stocks in the company which leads to dilution of control and ownership of the company which could prove fatal to the company. It could give an easy entry for the competitor and increases the takeover implications.
Benefits of QIP:
Companies prefer QIPs mainly for two reasons: (i) time saving – because of less formalities and regulations and (ii) Cost efficient – because companies have to pay incremental fees to the exchange only and all other issue related costs are scrapped.
QIBs prefer QIPS because of provision of no lock-in period i.e., they can sell their shareholding at any point of time and they are also not bound to keep it for six months or whatever minimum requirement of SEBI is there for other issues. Also they get directly, a major share of ownership holding in any organization.
Conclusions:
The major concern is for those companies who use QIP to raise money for retiring their debt. It is like selling oneself to pay the debt. Though the debt is removed from the balance sheet by this method but in turn company dilutes their rights and ownerships to a major QIB or investor. So it’s a kind of bootstrap where, while coming over from a particular problematic situation, company enters another possible problematic condition. So companies must strategically work on their debt-equity mix and decide the probable uses of funds.
Despite all the negativities present with QIPs, it is the most favorable and cost saving tool for raising money primarily in Indian markets for the companies during the low investors confidence or recessionary periods. Though QIPs are continuously losing their sheen, companies are again coming back to their previous fund raising tool i.e., IPO and many companies have already announced their IPOs e.g., Tata Power, Reliance Capital etc.
For Feedback: vermadeepaksoni@yahoo.co.in
Abstract:
Post financial crisis scenario, Indian stock markets were facing boom of Qualified Institution Placements (QIPs) mainly by real estate giants like Unitech & India bulls infrastructure. News of issuance of QIP made a permanent place in all the dailies every day. QIP is a cost-effective and time saving fund raising tool for any organization, so every one of them looking to get a pie of it. But the motive behind this paper is to find out that what influences the companies to race for QIPs in current scenario and why wouldn’t they be following Initial Public Offer (IPO) route as they used to do previously? This paper throws some light on the regulations involved in issuing QIP, their benefits and drawbacks while answering the above question.
Introduction:
The oxygen of any business is funds or cash which keeps it going indefinitely as per the Going Concern Concept of GAAP principles. There is plethora of sources from where an organization can raise funds for accomplishing activities of expansion, growth and diversification. These funds could be raised either from domestic market or foreign market. Raising funds from domestic market involves the options of IPO for equity shares, preference shares and/or debentures; bank loan and finally QIP. Whereas raising funds from foreign market involves the route of ADR/GDR/FCCB. All these modes are highly differentiated in respect to the ownership dilution, cost of issue, time of issue, increased liability, more regulations etc.
But the major focus of this paper is on QIP (which is one of the method of raising money from domestic markets) so let’s discuss it. “QIP can be simply defined as the method of raising money/funds from the market by issuing equity shares, fully and partly convertible debentures or any securities excluding warrants to a Qualified Institutional Buyers (QIBs) by any listed company in India”. It is the cost-effective and time saving tool for raising money in comparison to IPO or bank loans.
Now the question arises why QIP? In FY 2004-05 the total inflow of ADR/GDR funds was around $2.5 billion which is projected to $ 4.5 billion in current fiscal. From this data we can analyze that how rapidly Indian firms are moving abroad for raising money and the only reason behind this is presence less regulations as compared to SEBI regulations. In order to maintain liquidity in Indian market and motivate corporates to raise money here, SEBI launched QIP scheme in 2006 with less regulations and flexibility. Over a month since April, the money raised through QIPs has already exceeded the Rs. 3586 Crore raised in the whole of 2008. Also 114 companies are in QIP queue to raise $ 18 billion from the market which includes Sterlite Industries, Reliance Infrastructure, Hindalco Industries ($500 million), Axis Bank ($ 71.4 million), Adani enterprises (Rs. 15000 million), Educomp Solutions Ltd. (Rs. 6067 million) to name a few.
QIP rules & regulations:
Under QIP Scheme of SEBI, company who wishes to raise fund through this mode should be listed on an exchange and needs to issue minimum of 10% of the securities to mutual funds. Moreover, it is mandatory for the company to ensure that there are at least two allottees for the size of issue of Rs. 250 Crore and at least five if the size is more than Rs. 250 Crore.
These instruments are basically meant for Qualified Institutional Buyers (QIBs) who are institutional investors, perceived to possess in evaluating and investing in the capital market. These includes, public financial institutions, scheduled commercial banks, mutual funds, FIIs, provident funds, pension funds, venture capital funds, insurance companies, etc.
Though these regulations were made quite flexible and easy way for the companies to raise their funds but due to fluctuating and cyclical pattern of crest & trough (boom & fall) of world’s economy, affected the market heavily and lowered the investors’ expectations. To remain operational companies need fund and under such liquidity crunch it’s very hard to influence investors to invest in their company.
Boom & crunch in QIP issue:
In Pre-Lehman fall era, QIP was not so famous in the capital markets instead companies took the IPO route since investors are optimistic about the market and ready to take risks. At that time, investors emotions were high because of rapid and large growth in country’s as well as world’s economy. India’s GDP before Lehman fall led financial crisis i.e. around 2007 & early 2008 was at 9.3% approximately and similarly stock exchanges (economic barometers) were doing extremely good and were at their highest level in their history, for instance, BSE Sensex crossed 21000 marks and NSE’s Nifty crossed 6000 points in January 2008.
But this situation flipped after the great financial tsunami which was driven by the bankruptcy of Lehman brothers and subsequently all its associated companies directly or indirectly. After this crisis, liquidity crunch happened all across the globe (thanks to globalization) and markets plunged drastically.
Due to great efforts put in by RBI & SEBI for revival of the economy by creating liquidity in the market, investors starts to get stable and started trusting companies’ fundamentals. But this period of stability doesn’t remained for much time and ‘Satyam’s Fraud Saga’ happened which surprised the every investor and was an example of lack of corporate governance and one of the biggest frauds that investors fraternity could think of. All above events are sufficient enough to shake the investor’s emotions due to which they become risk averse and start doubting every company in the market, which ultimately leads to failure of many IPOs like the Gujarat State Petroleum Corporation’s IPO for raising $ 1 billion, got delayed by two months. Thought this is not the sole reason for IPO failures but it could be one of them.
After this atrocious situation companies were left with an option to raise money from foreign markets. Then, SEBI introduced the fastest capital raising tool on May 2006 called Qualified Institutional Placement (QIP) to prevent listed companies in India from developing an excessive dependence on foreign capital like ADR/GDR. These companies were allowed to raise capital from its domestic markets without the need to submit any pre-issue filling to the regulator.
The main logic behind using this tool was that it is easy to convince couple of big investors like QIBs than the whole public which involves a huge cost as well for advertisements etc. If we look at the previous trends most of real estate companies came up with the QIPs (because real estate sector was one which was one of the cause of crisis (subprime mortgage crisis)) e.g., Unitech raised $ 325 million through QIP and was the successful one in doing that which was followed by Shobha developers who raised Rs. 526.89 Crores, Nagarjuna Constructions came up with QIP of Rs. 550 Crore etc. Following this trend other non real estate companies also joined in like Suzlon energy came up with Rs. 2000 Crore, Shree Renuka Sugars with QIP of $ 105 million then Max India and Bank of Rajasthan were quite a few with target of Rs. 400 Crore and Rs. 250 Crore respectively. Various companies raises funds through QIP for various reasons e.g., Shree Renuka raised funds to expand the company’s refining capacity, Tech Mahindra raised it to retire its debt, Bank of Rajasthan raised to meet Basel-II adequacy norms etc. Various Companies raises funds to meet their diversified needs based on their nature of business and kind of operations they are in.
After few successful QIP like that of Unitech & Indiabulls real estate, every second company started issuing QIP to raise money either to meet their working capital needs or to retire their debt, these issues started declining. The major reason behind their decline is the method of pricing of these issues by SEBI. According to SEBI, the price of issues should not less than the higher of the following:
(i) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date;
(ii) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the two weeks preceding the relevant date.
Due to this fixed formula for QIP pricing, if suddenly market emotions falls like we have seen during post budget session in July 2009, the stock prices began to fall. And, in that condition instead of going for high valued QIP (historical average prices of weekly high and weekly low); investor will choose to buy from the market at low prices. For example, companies which have managed to raise the money from the market using this tool had to downsize their issues, like, shobha developers which could raise only $ 111 million against $ 300 million planned initially.
Implications of QIP:
Because of lack of lock-in period QIBs are likely to exit from issue whenever market shows upward trend and as majority of investors in India trade only on speculative basis, they also start selling their ownership rights which could affects the company’s image.
Another issue related with QIP and could be dangerous for issuing company is dilution of the ownership. QIPs allow an investor to buy majority stocks in the company which leads to dilution of control and ownership of the company which could prove fatal to the company. It could give an easy entry for the competitor and increases the takeover implications.
Benefits of QIP:
Companies prefer QIPs mainly for two reasons: (i) time saving – because of less formalities and regulations and (ii) Cost efficient – because companies have to pay incremental fees to the exchange only and all other issue related costs are scrapped.
QIBs prefer QIPS because of provision of no lock-in period i.e., they can sell their shareholding at any point of time and they are also not bound to keep it for six months or whatever minimum requirement of SEBI is there for other issues. Also they get directly, a major share of ownership holding in any organization.
Conclusions:
The major concern is for those companies who use QIP to raise money for retiring their debt. It is like selling oneself to pay the debt. Though the debt is removed from the balance sheet by this method but in turn company dilutes their rights and ownerships to a major QIB or investor. So it’s a kind of bootstrap where, while coming over from a particular problematic situation, company enters another possible problematic condition. So companies must strategically work on their debt-equity mix and decide the probable uses of funds.
Despite all the negativities present with QIPs, it is the most favorable and cost saving tool for raising money primarily in Indian markets for the companies during the low investors confidence or recessionary periods. Though QIPs are continuously losing their sheen, companies are again coming back to their previous fund raising tool i.e., IPO and many companies have already announced their IPOs e.g., Tata Power, Reliance Capital etc.
For Feedback: vermadeepaksoni@yahoo.co.in
Sunday, May 30, 2010
Timing adjusted first mover advantages
We know the heights of 'first-mover advantage' in any arena of this universe. Innovating something through intellectual called intellectual property or using something already existing in another part of geography helps entrepreneur to reap firs mover advantages in terms of recognition, good brand building or huge untapped revenues. By the time competitors copy the idea and moves into the same space, first mover has already reaped the fruits of what he has sown by entering first.
Despite of having good idea or good IP based product or service or any other measure to make money out of market participants, success of first mover also depends on the timing of entry. Timing has so much to do with the potential benefits and gains associated with the new offering, along with the level of application of that offering.
Timing means, analyzing the market environment, industries' status, government policies and regulations, global events and risk appetite of consumers or investors. If timing can't be taken care of, then the above mentioned first mover advantages will be lost in no time and brings failure at huge cost and losses.
The similar scenario happened with Standard Chartered Bank which currently issued Indian Depository Receipts (IDR) in Indian market to raise funds from investors. IDR is nothing but the financial instrument in the form of depository receipt created by Indian depository in India against the underlying equity shares of the issuing company. In an IDR, foreign companies would issue shares, to an Indian Depository (say National Security Depository Limited – NSDL), which would in turn issue depository receipts to investors in India. The actual shares underlying the IDRs would be held by an Overseas Custodian, which shall authorise the Indian Depository to issue the IDRs.
Standard Chartered entered India by issuing IDR to raise money and increasing its brand presence and better penetration into the Indian markets as compared to its counterparts. Standard Chartered wants to gain all the first mover advantage as its the first who issued IDRs in Indian market. 10 IDRs constituted 1 share of Standard Chartered which were in the price band of Rs. 100 - Rs. 115 based on its share prices on NYSE.
It incurred huge costs in launching of this issue which involves large chunk of expenditure on advertisements (print & media), registration fees, underwriter fees and other such expenses. Despite of such a big hole in his pockets, it didn't reaped the benefits to that level which it expected while entering.
Though, few reasons are attributed to the product structure but major reason behind not so successful IDR issue, is the bad timing. In its IDR issue, they mandated that qualified institutional buyers (QIBs) have to pay upfront 100% of the subscription fees, and not like other issues where they can make part payment. Because of this reason, it didn't received such success as it expected to be, because the above clause, it saw least participation from institutional investors.
If we look at the retail side, individual investors are the most threatened species on Earth since a smallest tremor in the market causes them to sit back. The timing is bad in the sense that, European crisis is on rise by adding every day a new country in the list of debt ridden economies and thereby extending the so called abbreviation of the century i.e., PIIGGS meaning Portugal, Italy, Ireland, Greece, Great Britain & Spain.
Another bad timing effects are tightening of monetary policy by RBI which confuses investors in analyzing the likely future scenario, then major oil spills due to natural and other reasons which raises oil prices along with the bad environmental effects.
Above mentioned domestic and world events left investors in confused state of mind in analyzing the potential benefits by applying for StanChart's IDRs and the only thing they elevated in their analysis is risk component which is absolutely there.
Despite of bad timings and product rigidity, institutional investors helped Standard Chartered in sailing out its IDR issue through turbulent conditions and received 2.4% more subscription then the issued IDRs at a price of Rs. 104. These IDRs are expected to be listed by June 11, with the allotment of new shares by June 7. Standard Chartered through this IDR issue raised Rs. 2,490 Crore ($530 million).
The only awaited time after such tough sailing through, is the success of its shares on the national bourses. Whether they will prove to be helpful for investors in price appreciation and giving them capital gains? Will it give the potential returns to the investors who will be allotted shares? Will it give the intended first mover advantages for which Standard Chartered walked towards its first move? This is the beginning of new story in Indian capital market and now its time to wait and watch the level with which Standard Chartered will be benefited and to see who will be next in the queue for the same.
Despite of having good idea or good IP based product or service or any other measure to make money out of market participants, success of first mover also depends on the timing of entry. Timing has so much to do with the potential benefits and gains associated with the new offering, along with the level of application of that offering.
Timing means, analyzing the market environment, industries' status, government policies and regulations, global events and risk appetite of consumers or investors. If timing can't be taken care of, then the above mentioned first mover advantages will be lost in no time and brings failure at huge cost and losses.
The similar scenario happened with Standard Chartered Bank which currently issued Indian Depository Receipts (IDR) in Indian market to raise funds from investors. IDR is nothing but the financial instrument in the form of depository receipt created by Indian depository in India against the underlying equity shares of the issuing company. In an IDR, foreign companies would issue shares, to an Indian Depository (say National Security Depository Limited – NSDL), which would in turn issue depository receipts to investors in India. The actual shares underlying the IDRs would be held by an Overseas Custodian, which shall authorise the Indian Depository to issue the IDRs.
Standard Chartered entered India by issuing IDR to raise money and increasing its brand presence and better penetration into the Indian markets as compared to its counterparts. Standard Chartered wants to gain all the first mover advantage as its the first who issued IDRs in Indian market. 10 IDRs constituted 1 share of Standard Chartered which were in the price band of Rs. 100 - Rs. 115 based on its share prices on NYSE.
It incurred huge costs in launching of this issue which involves large chunk of expenditure on advertisements (print & media), registration fees, underwriter fees and other such expenses. Despite of such a big hole in his pockets, it didn't reaped the benefits to that level which it expected while entering.
Though, few reasons are attributed to the product structure but major reason behind not so successful IDR issue, is the bad timing. In its IDR issue, they mandated that qualified institutional buyers (QIBs) have to pay upfront 100% of the subscription fees, and not like other issues where they can make part payment. Because of this reason, it didn't received such success as it expected to be, because the above clause, it saw least participation from institutional investors.
If we look at the retail side, individual investors are the most threatened species on Earth since a smallest tremor in the market causes them to sit back. The timing is bad in the sense that, European crisis is on rise by adding every day a new country in the list of debt ridden economies and thereby extending the so called abbreviation of the century i.e., PIIGGS meaning Portugal, Italy, Ireland, Greece, Great Britain & Spain.
Another bad timing effects are tightening of monetary policy by RBI which confuses investors in analyzing the likely future scenario, then major oil spills due to natural and other reasons which raises oil prices along with the bad environmental effects.
Above mentioned domestic and world events left investors in confused state of mind in analyzing the potential benefits by applying for StanChart's IDRs and the only thing they elevated in their analysis is risk component which is absolutely there.
Despite of bad timings and product rigidity, institutional investors helped Standard Chartered in sailing out its IDR issue through turbulent conditions and received 2.4% more subscription then the issued IDRs at a price of Rs. 104. These IDRs are expected to be listed by June 11, with the allotment of new shares by June 7. Standard Chartered through this IDR issue raised Rs. 2,490 Crore ($530 million).
The only awaited time after such tough sailing through, is the success of its shares on the national bourses. Whether they will prove to be helpful for investors in price appreciation and giving them capital gains? Will it give the potential returns to the investors who will be allotted shares? Will it give the intended first mover advantages for which Standard Chartered walked towards its first move? This is the beginning of new story in Indian capital market and now its time to wait and watch the level with which Standard Chartered will be benefited and to see who will be next in the queue for the same.
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