SEBI turns down proposal on easing QIP pricing norms

The Securities and Exchange Board of India (SEBI) scrapped the proposal requesting loosening of pricing norms for the Qualified Institutional Placement (QIP). Relaxing the pricing norms would have made it easier for companies to raise capital amid turmoil caused by the pandemic. Therefore, a plea was made to SEBI by merchant banks to permit companies to offer a 10% discount on the floor price.

The present market fluctuation is forbidding the companies under existing norms to price their offerings more alluringly. Therefore, they are facing acute shortage of funds. As per prevailing rules, it is mandatory that the issue price in a QIP to not be less than the average of weekly high and low for 2 weeks preceding the relevant date. Bankers have now requested a discount to be increased from 5% to up to 10%. This will offer a great relief to the companies and will aid institutional investors to raise money.

The market scenario:

The capital markets regulator said that the share prices are already at their lowest and demand of further discounting is not justifiable. As compared to previous years, market is already at its low. From the day the news of corona virus was out in February till present, there has been huge declines. Nifty went down by 24%. Similarly, mid cap and small cap witnessed a decline by 27% and 26%. The losses could have been further high if the markets would not have recovered in the past weeks.

Money raised from QIPs between 2015 to 2019 by corporate India amounts to ₹1.31 trillion. To emphasize further, organizations have raised around Rs 51,216 crore through QIPs in FY20. According to 2020 data, capital amounting to ₹20,360 crore has been raised from QIPs.

SEBI proactively extending relaxations amidst pandemic:

Since the beginning of the lock down, SEBI has been proactively giving genuinely necessary relaxations to help listed entities and indirectly to the public shareholders supporting them to face the economic turmoil invited by the pandemic. In March, RBI proposed to relax the compliance of the compulsory 6 months gap between 2 back to back QIP issues. This was after the requests of companies wanting a waiver on the requirement of the cooling off period between two back to back QIP issues. Further, raising funds via rights issues and initial public offerings have already been made easier for companies. The recent request is much in line with relaxations. The regulator has granted relaxations for making ways easier for the companies to raise money from the market.

How will this relaxation help companies?

Investment bankers mention that lower floor prices in QIP issues will provide better access to capital by the companies. Moreover, QIP provides a fast track way that allows organizations that are listed to raise funds through equity or equity-linked instruments. Changes in QIP norms will improvise access to equity capital. Increasing the discount on floor rate to 10% will provide a larger stretch to companies to raise equity capital in a highly volatile and risky market scenario. This may lead to higher dilution, but the capital may be critical for survival and supporting business.

Undoubtedly, this will concern the capital markets regulator. According to bankers, there is not much scope of malpractices. The issue of QIPs does not allow promoters to take part. In case of dilution, it will affect not only shareholders but promoters too, hence keeping a natural check on pricing and sizing of a QIP issue.

Post lock down Scenario:

When the economy and markets begin recouping post the lock down, QIPs could rise as a significant raising support for organizations. So a relaxation on the pricing norm as discussed earlier will have a great positive impact.

States impose higher taxes to raise revenue