Is India’s QIP Destroying Investor Wealth?

This article was first published in the Global Association of Risk Professionals on June 01, 2018. Co-authors: Nikhil Rastogi, Chakrapani Chaturvedula

https://www.garp.org/#!/risk-intelligence/market/financial-markets/a1Z1W000003ImP8UAK

Analysis indicates that an institutional share-issuance program is associated with lower shareholder returns.

Imagine you are an investor in one of India’s listed companies whose share price is Rs.100. You come across an announcement that the company is offering some shares to institutional investors at a price of Rs.95. You wonder why, but then you just let it go. 

As you track the stock price over the next few months, it falls below Rs.100 and even below Rs.95 – even as the broad market is trading at higher levels than at the time or the institutional offering. Maybe the company’s performance was bad, you wonder. But you also observe many such examples of companies trading below their offering price.

Welcome to the world of Qualified Institutional Placement (QIP).

QIP is one of the methods of raising equity by listed companies, with follow-on offer, rights and preferential allotment being the other methods. Under QIP, started in 2006 by the Securities and Exchange Board of India (SEBI) as a faster and cost-effective way to raise capital, shares are issued to a select group of Qualified Institutional Buyers (QIBs) – usually mutual funds, insurance companies, etc. – at not less than the average of the last two weeks’ high and low price (also known as floor price). A further discount of 5% on the floor price was allowed by SEBI in later years.

We reviewed the return performance of 84 QIPs from 2010 to 2016, in terms of average holding period returns for 3 months, 6 months and 1 year post the issue of QIP. Thus, we broadly analyzed whether on average investors made or lost money on QIP investments.

As depicted in the bar chart, average short-term holding period returns (3 and 6 month) are negative for all years. Excepting 2013, 1-year average returns across all years are negative or very marginally positive.

Index Comparison

 

Since the returns could be impacted by general direction of the market in a specific year, we also computed comparable, average holding period returns of the S&P BSE 500 index. For each year, we use S&P BSE 500 index price at the same time that a QIP was issued, and then use the index level 3 months, 6 months and 1 year hence to compute the returns. These are then averaged to arrive at returns for a particular period (3-month, 6-month and 1-year).

As depicted in the bar plot, 3- and 6-month returns are positive for most of the years. Except for 2015, the 1-year returns are positive for all years between 2010 and 2016.

This in essence means that QIPs have not been such a good investment for QIBs as compared to returns on an unmanaged index such as S&P BSE 500.

Now, here we are not measuring the performance of lay investors. These are expert investors getting paid to make investment decisions, and on an average they are losing money for all holding periods from 3 months to 1 year, both absolutely and relatively (compared to S&P BSE 500).

Double Whammy

Another point to note is that many of these QIPs have been issued at a discount of around 5% to the trading price (average two weekly high and low price before the QIP offer). From the perspective of long-term, non-QIB investors this comes as a double whammy. First of all, non-QIB investors are not offered shares at discounted prices; and to add insult to injury, the stocks trade below this price for the next year.

The analysis until now shows that, prima facie, both QIB and non-QIB investors are losing money for average holding periods of 3 months, 6 months and 1 year. But could it really be true for QIB investors? As per the QIP regulation, the issued shares have no lock-in period; that is, they can be sold by QIBs at any point after the issue is made.

 This is as opposed to the regulation in a preferential offer (another method of raising equity by listed companies), where there is a minimum lock-in period of 1 year – the shares cannot be sold before one year. So technically, making use of this regulation, smarter QIBs might be selling the shares so issued, thus driving down the prices of stocks.

We do not have access to detailed data of holdings of respective QIBs across different dates, and we cannot infer if QIBs are moving out of the stocks after subscribing to them. However, the results are consistent with the view that on an average QIP, shares are witnessing downward pressure on account of selling, which is leading to negative holding period returns.

This selling pressure is more likely to come from experts (QIBs) rather than others. The source of selling may be a mystery, but to retail investors, the broad message is clear: QIP could be synonymous with dip.