QIPs: Quick-fix funds for companies pose risk to shareholder value

Qualified Institutional Placements (QIPs) are becoming the quickest way for Indian companies to raise capital, reflecting their appeal as a quick fund-raising tool, but they also present several challenges.

By October 2024, companies had already raised a staggering Rs 88,600 crore, rising sharply from Rs 53,070 crore in 2023.

Dilution of shareholders’ ownership

However, beneath the impressive numbers lies a critical concern for shareholders: The dilution of equity and what it signals about the confidence of retail investors in these companies’ long-term prospects.

QIPs, introduced by the Securities and Exchange Board of India (SEBI) as a streamlined method for raising capital directly from institutional investors, have surged in popularity. For listed companies, they offer a faster and less cumbersome alternative to traditional public offerings.

Yet, the very mechanism that allows a company to issue new shares to raise funds also increases its outstanding total shares, diluting existing shareholders’ ownership in that company. This dilution isn’t just a technical adjustment — it has real implications for investor confidence, mainly when companies repeatedly resort to QIPs.

Watch: Inflation, price surge: Why is Modi govt silent? | Capital Beat

Lack of confidence?

For many, frequent QIP activity raises an uncomfortable question: Are these companies signalling a lack of confidence in their ability to sustain growth through operational cash flows or other less dilutive methods?

Issuing shares, especially at discounted prices, to institutional investors suggests a short-term focus on capital needs over a commitment to preserving shareholder value. This perception risks undermining investor trust as retail shareholders watch their stakes shrink without explicit assurances of long-term benefits.

“A significant drawback of QIP is the potential for existing shareholders’ stake dilution despite minimal dilution compared to other methods. QIP restricts the investor base to qualified institutional buyers, limiting broader market participation,” says Vinayak Hagargi writing for Alice Blue, a brokerage firm based out of Chennai.

Risks of reliance on equity markets

The bullish equity market up until recently has enabled companies to minimise dilution to some extent, as higher stock valuations mean fewer shares are needed to raise funds. Bajaj Finance’s Rs 8,800-crore QIP and other significant issuances in 2023 leveraged these favourable conditions.

However, market dynamics are inconsistent, and reliance on equity markets exposes companies to significant risks. Companies could issue more shares in a less favourable market at lower valuations, further eroding investor confidence and potentially driving down stock prices.

Watch: Indian markets rejoice Trump win; what next?

Sectoral activity in QIPs reflects broader trends in India’s economic recovery and growth. While banking and financial services dominated fundraising in 2023, the real estate sector has taken the lead in 2024, with developers raising Rs 13,000 crore by September.

Companies such as Prestige Estates and Microtech Developers have channelled funds into debt repayment and project expansion, underscoring the capital-intensive nature of their operations.

Cascading impact

Yet, the frequent need to tap external funding raises questions about their financial health and self-sufficiency. This signals potential overdependence on institutional funding for shareholders, which can dilute ownership and confidence in the company’s ability to weather economic challenges.

Dilution has a cascading impact on investor sentiment. When retail shareholders see their stakes erode, they often view it as a sign of underlying instability. While benefiting from favourable terms in QIPs, institutional investors gain significant influence over corporate governance. This imbalance can leave retail shareholders feeling sidelined, especially if frequent QIPs are perceived as reactive rather than strategic.

“Issuing new shares can dilute the ownership of existing shareholders. Only qualified institutional buyers can participate (in such funding rounds), excluding retail investors. Shares issued through QIPs have a mandatory lock-in period of one year, restricting liquidity,” says Fyers Securities.

Watch: Unicorn vs Indicorn: Ace investor weighs in

Making hay while the sun shines

The high levels of QIP activity may reflect the urgency for companies to capitalise on favourable conditions before potential market volatility — such as pre-election uncertainties — sets in.

However, this short-term approach risks leaving companies vulnerable in the future, mainly if they rely heavily on equity issuance during periods of economic downturn. A weaker market would force companies to dilute equity further, amplifying the strain on investor confidence.

Some brokerage firms have suggested that companies must demonstrate that their reliance on QIPs is strategic and not symptomatic of financial instability. Clear and transparent communication about using funds — whether for growth initiatives, debt reduction, or operational improvements — is critical.

Companies should also prioritise aligning QIP activity with broader shareholder interests, ensuring that the benefits of fundraising outweigh the costs of dilution.

Double-edged sword

Right now, QIPs are a double-edged sword in the corporate landscape. They provide much-needed liquidity and support growth, but risk signalling a lack of confidence in a company’s self-sustainability.

For shareholders, particularly retail investors, the current surge in QIPs represents both an opportunity and a challenge.

Companies that fail to justify their frequent reliance on this mechanism risk eroding trust and devaluing long-term shareholder interests.

As the markets evolve, the success of QIPs will depend on how much capital companies can raise and how effectively they can balance growth, shareholder equity, and investor confidence.