Welcome step

One of the dangers of opening up the economy is that a part of India's capital market gets exported. According to Barclays Capital, Indian companies raised Rs 17,136 crore through FCCBs and another Rs 17,982 crore through ADR/GDRs in 2005, or a total of Rs 35,118 crore from overseas capital markets. This compared with Rs 26,880 crore raised in the domestic equity market. It is this that the Securities and Exchange Board of India (Sebi) has addressed, by allowing companies to raise money through the qualified institutional placement (QIP) route, a step that restores parity between domestic qualified investors and foreign institutional investors (FIIs). From now on, some of the money invested in overseas issues will be domestic, and even the issue costs will flow to domestic players. For companies, the benefit will be lower costs for raising funds. The retail investor will be left out of the process, but since these issues will replace the FCCB/GDR route more than follow-on offers, little is lost.

Among the biggest beneficiaries will be mutual funds, since they have a minimum 10 per cent reservation in such issues. Mutual funds and other domestic QIBs could have subscribed to private placements earlier too, but since these issues came with a lock-in period, mutual funds have hesitated to subscribe as it restrained exit. QIPs will now come on mutual funds' radar screen as they can now sell such securities on a stock exchange without any lock-in period. The 10 per cent reservation for mutual funds is the regulator's endorsement of domestic funds as a key investor group, now that they are attaining critical mass. Such a placement will help them buy reasonably large holdings in companies where stock liquidity is not good on the secondary market.

The benefit for companies is that they will not need to come out with a follow-on public issue if they can raise their target amount through the QIP route. Since the relaxed norms do away with filing a pre-issue document with Sebi, companies will save both time and cost""since a follow-on issue is also more expensive compared to an initial placement. Companies can get a premium to the prevailing market price in QIPs, which is not possible in a follow-on offer.

Companies may well prefer the QIP route to the GDR/FCCB market as well, because of the cost advantage. Merchant bankers estimate the cost of QIPs to be similar to the private placement cost of about 1.5-2 per cent, while a GDR/FCCB can cost about 5 per cent, due to high legal costs and merchant banking fees. Of course, it is not that the G / F route will close. FIIs that are not registered with Sebi or which do not operate through a sub-account, can also invest in GDRs as long as they do not convert the GDRs. So, companies that may want to tap this specific category of investors may still go through the GDR/FCCB route. Since the guidelines do not put an either-or clause, both systems can co-exist. Some qualified institutional buyers may resort to selling their holdings in the secondary market after getting an allotment in the QIP category, thereby maintaining their investment and booking some tax-free profits, but it must be presumed for the time being that such leakages will not be significant.