The Securities and Exchange Board of India (SEBI) has rejected a recent proposal aimed at supporting financial firms that are struggling to raise adequate funds. The proposal had suggested a relaxation of pricing norms for Qualified Institutional Placements (QIPs). A qualified institutional placement is, at its core, a way for listed companies to raise capital, without having to submit legal paperwork to market regulators. It is a preferred route for equity fund-raising in India.
Specifically, investment bankers, on behalf of companies, had asked the capital markets regulator to allow companies to offer a discount of 10% on the floor price. They had argued that earnings uncertainty has gripped the market in these times of crisis.
For context, the official rules mandate that the issue price in a QIP cannot be less than the average of the weekly high and low pricing, for a time span of 2 weeks before the issue price is set. Additionally, a discount of 5% on the floor price could be offered to potential investors.
Investment bankers had felt that this rule was deterring institutional investors from committing money, in these critical times. But SEBI counteracted the suggestion as they felt that share prices were already trading at lower levels. “Pricing is possible at 5% discount. Demand for more discounts is not justified. Market is already trading at a steep discount compared to earlier levels,” said an industry insider. SEBI, however, did not comment in this development.
Nifty has fallen 24%, the mid-cap index has declined 27% and the small-cap index has dropped 26% in share markets since February 19. This was a direct result of the aggressive stock sell-off that shot up in light of the pandemic caused by Coronavirus. But for the market to recover, the losses would have been deeper, in the past month or so.
QIP is one of the most preferred fund-raising routes for companies due to the relatively easy processes. Listed Companies had raised about ₹51,216 Crore and ₹10,489 Crore through QIPs in FY20 and F19 respectively, according to Delhi- based Prime Database.
SEBI had already relaxed some rules based around fund-raising, this year. In March, it proposed to relax the requirement of the mandatory six-month gap between two successive QIP issues, following requests from companies seeking a waiver on the requirement of a cooling off period between two successive issues. “Wherever possible SEBI has been giving relaxations and is looking at ways to make it easier for companies to raise funds from the market,” said a person familiar with the development.
However, investment bankers are opining that the only plausible way to help companies raise money with the share prices, tanked since February 19, is lower floor prices in QIP issues. “It is worth considering changes in QIP norms to improve access to equity capital. Raising the discount on floor price from 5% to 10% would provide more flexibility to companies to raise risk capital in an increasingly volatile and risk averse market environment. While this may lead to higher dilution, the capital may be crucial for survival and sustaining business operations,” said Mehul Savla, partner at Ripplewave Equity Advisors.
Industry insiders are speculating that SEBI could have rejected the plan over concerns of misuse as well, but bankers say that there is little scope for wrongdoing. “Promoters are not allowed to participate in QIPs, so the dilution impacts all shareholders including promoters and public shareholders, thereby creating a natural check on the size and pricing of a QIP. Retail participation in QIPs comes indirectly as mutual funds, insurance companies are playing a bigger role in such transactions,” Savla explained.