Qualified institutional placements (QIPs) appear to be crowding out private equity firms (PE) in fund-raising activity of public listed companies in India. In the current year, while there was a sharp rebound in India Inc’s fund-raising from institutional investors through QIPs, PE deals in listed companies remained depressed.
Somasekhar Sundaresan, partner at corporate law firm JSA said, “The stock market is always the biggest competitor to private equity with its valuations, which come without the strings of governance discipline attached. Corporates will continue to opt for QIPs if the market does well.”
In 2009 when the value of fresh PE investments in public-listed firms, also referred to as private investment in public equity (PIPE) deals, more than halved over last year, Indian-listed companies garnered more than Rs 32,000 crore through QIPs, over 10 times that of 2008, as per data collated by Delhi-based merchant bank SMC Capital.
Merchant bankers who advise companies on fund-raising options say companies prefer QIPs over PE investment for various reasons. These include the need for giving board representation to a representative of the PE firm if it is picking up a significant stake, which is not mandatory in case of QIPs. Besides scrutiny on management decision, PE investors also tend to take a much longer time to invest through stringent due diligence compared with QIPs which usually take place within a few weeks.
Says Jagannadham Thunuguntla, equity head, SMC Capital: “QIPs can be done without much of a hassle compared to private placement to PE firms where it could take up to six months. This tends to make companies opt for QIPs for raising funds.” Besides giving listed companies the option to raise funds, QIPs also enable them to raise money from foreign investors in the domestic market rather than going abroad and issuing shares in international markets through depository receipts.
One reason why PE firms are not striking too many PIPE deals could be the sharp rise in stock prices as the economy showed signs of recovery. A senior executive in an international PE firm said: “The decline in the number of PIPE deals is largely due to the surge in valuations.” However, he added that investments are not related to the stock market movement alone as investors keep a long-term perspective in mind.
Analysts tracking PE investments point out that the PE firms that had avoided investing in stocks when valuations crashed last year, may be finding it difficult now to explain their decision when the share prices of many companies have more than doubled in 2009.
Source: Economic Times