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.
