If you are into Stock Market then I am sure you have heard about the term I have it in Title “QIP”. Many of us may not be aware of this term and so first I would like to throw some light on this term and what its all about.
What is QIP?
QIP is full form of Qualified Institutional Placement which is a fund raising tool, whereby any listed company can issue equities or debentures to Qualified Institutional Buyer (QIB). It is one of the few fastest methods of raising capital for a company.
Now from the above definition its quite clear that any company who is in need of funds quickly would prefer to use QIP.
So now as an investor should you invest in companies which are going through the QIPs in just a first chance of the up swing in Indian Market.
There are 2 kinds of sentiments prevailing in the market.
- No you should not because this companies were at the verge of non-existent in some time from now. But as the equity markets got better they manage to get some capital and now the existent of such companies are not questioned for a foreseeable time but then they could not pass the test of bad time.
- Yes as they have managed to get the ball rolling and there is quite a bit of upside possible in this kind of companies who were ( before the QIPs got through ) at down to earth prices.
Now for an investor like me its a bit of concern as to how to judge which of the two argument to go with.
We normally do not take the benchmark of QIP to invest in the stock but then there is a very good indicator coming my way looking at the QIP pattern which I have used to judge the stock. I have already been successful and so it has worked for me already but do not try the same on the stock discussed here as an example but work on the theory for some other set of stocks if possible in the near future.
You should first get the answer to the following questions
- Why is the company raising the fund?
- How is the fund going to be used?
Now the answer to the above questions could be that the major portion of the money would go into paying the debts of the company which means you should avoid that stock. The reason is they have diluted their own stake in the company to pay the so called liabilities. Thing like selling oneself to pay the debt.
If the major portion of the fund goes into the capital requirement for growth then you can safely assume that the balance sheet of the company is not that bad and its on the good growth path which is the main reason of the fund raising plan.
- Unitech / Suzlon / Indiabulls Realestate — All raised funds to pay debt
- Educomp — Would need the fund for Growth Capital requirement of the company
- Dish TV — Raised fund but not through QIP but the major portion of the fund is used for growth of the company
- GMR — Opted not to go for a QIP