Boost for PIPE deals as Sebi amends QIP guidelines

The recent amendments to qualified institutional placement guidelines may boost private investments in public equity deals.

After being in the downtrend in the first half of the year, deals in listed companies will revive, say experts, making it easier for the cash-starved firms to raise capital.

The Securities and Exchange Board of India, after receiving comments from various parties, said QIPs should be based on the average price of the shares two weeks prior to the issue.

The earlier pricing formula had made matters worse for investors as it required to take an average price of six months or 15 days, whichever is higher.

In a bear market, where stocks fall sharply, the QIP price always exceeds the current market price and investors are not willing to pay a premium for shares, which are available at rock-bottom prices.

Venture Intelligence chief executive officer Arun Natarajan says, "The earlier pricing formula was not conducive to PIPE deals as there was a disconnect between the current price of a share and the price at which it is being offered to institutional investors. But with the new regulations, pricing will be closer to the current market price in PIPEs.

"Such deals may move up pretty sharply in the next few months as valuations have become attractive for PE players."

During the bull run in 2007, numerous PIPE deals were done with private equity players. The buoyant sentiment in equity markets prompted a lot of firms to go for QIPs and preferential allotments, one of the modes for doing a PIPE deal.

However, with the credit market in turmoil and a steep slump in stocks, these deals have witnessed a decline. A lot of these deals have been yielding negative returns, reversing the mood of PE funds towards such deals.

Baer Capital Partners President and Founder Alok Sama says, "A significant impediment to PIPEs in the current environment is the disconnect between the current market price and the pricing based on Sebi norms (the latter typically being substantially higher). With pricing now based on a two-week window and therefore much more aligned with market, I would expect a renewed focus on PIPEs."

QIP deals in 2008 were impacted the most, with only seven issues from January to July compared to 17 in the corresponding period last year.

The total amount mopped up was significantly higher last year at Rs 8,421.54 crore (Rs 84.22 billion) as compared with just Rs 3,472.16 crore (Rs 34.72 billion) during the same period this year, according to Prime Database.

Says Gautam Gupte, director, Equity Capital Markets, Ambit Corporate Finance, "Now, deals will come within the realm of possibility. The QIP market was virtually dead. We have not seen a QIP issue in the last three months. But with this change in regulations, pricing will be closer."