What is QIP

QIP - Qualified institutional placement

Qualified institutional placement (QIP) is a capital raising tool, whereby a listed company can issue
Equity share
Fully and partly convertible debentures, or
Any securities other than warrants
Which are convertible into equity shares, to a qualified institutional buyer (QIB).

Apart from preferential allotment, this is the only other speedy method of private placement for companies to raise money.

It scores over other methods, as it does not involve many of the common procedural requirements, such as the submission of pre-issue filings to the market regulator

Why was QIP introduced?

To enable listed companies raise money from domestic markets in a short span of time, market regulator SEBI introduced the concept of QIP in 2006.

This was also done to prevent listed companies in India from developing an excessive dependence on foreign capital.

Prior to introduction of QIPs, the complications associated with raising capital in the domestic markets had led many companies to look at tapping overseas markets via foreign currency convertible bonds (FCCB) and global depository receipts (GDR).

This has also helped issuing companies price their issues closer to the prevailing market price.

Who can participate in the issue?

The specified securities can be issued only to QIBs, who shall not be promoters or related to promoters of the issuer.

The issue is managed by a Sebi-registered merchant banker. There is no pre-issue filing of the placement document with Sebi.

The placement document is placed on the websites of the stock exchanges and the issuer, with appropriate disclaimer to the effect that the placement is meant only for QIBs on private placement basis and is not an offer to the public.

Why there is a sudden rush for QIPs?

Several companies, especially real estate, were starved of money in the recent slowdown and were finding it difficult to stay afloat.

The revival in market sentiment came as a boon to these companies, which are rushing to raise money, mainly to retire expensive debt and restructure their balance sheets.

For these companies QIP has emerge as excellent tools, where they can raises thousand of Crores Rupee in a period less than a month.

In 2008 by way of QIP Indian company has raised more than 3500 Crores and expecting more in coming future.

FPO (Follow on Public Offer)

The basic difference between Initial Public Offer (IPO) and Follow on Public Offer (FPO) is as the names suggest IPO is for the companies which have not listed on an exchange and FPO is for the companies which have already listed on exchange but want to raise funds by issuing some more equity shares.

Companies usually go to debt market for raising their short term needs. Either they issue bonds or get loans. But if they have massive expansion plans they may not raise sufficient funds in the debt market and even if they could it costs more. Companies come with follow on offer to restructure the business or to raise funds for new business or to expand the existing business.

Similar to an IPO a price band is fixed (usually with the help of Investment banks) for the issue and interested investors can apply for it. Unlike the corporate actions (such as bonus, rights issue; they are applicable only to the existing stake holders) FPO is open to all investors. The price band for the FPO depends on the market value of the existing company shares and the reason for raising funds.

Key Ratios for Picking Stocks

The following 8 financial ratios offer terrific insights into the financial health of a company -- and the prospects for a rise in its share price

1. Ploughback and reserves

After deduction of all expenses, including taxes, the net profits of a company are split into two parts -- dividends and ploughback.
Dividend is that portion of a company's profits which is distributed to its shareholders, whereas ploughback is the portion that the company retains and gets added to its reserves.
The figures for ploughback and reserves of any company can be obtained by a cursory glance at its balance sheet and profit and loss account.
Ploughback is important because it not only increases the reserves of a company but also provides the company with funds required for its growth and expansion. All growth companies maintain a high level of ploughback. So if you are looking for a growth company to invest in, you should examine its ploughback figures.
Companies that have no intention of expanding are unlikely to plough back a large portion of their profits.
Reserves constitute the accumulated retained profits of a company. It is important to compare the size of a company's reserves with the size of its equity capital. This will indicate whether the company is in a position to issue bonus shares.
As a rule-of-thumb, a company whose reserves are double that of its equity capital, should be in a position to make a liberal bonus issue.
Retained profits also belong to the shareholders. This is why reserves are often referred to as shareholders' funds. Therefore, any addition to the reserves of a company will normally lead to a corresponding an increase in the price of your shares.
The higher the reserves, the greater will be the value of your shareholding. Retained profits (ploughback) may not come to you in the form of cash, but they benefit you by pushing up the price of your shares.

2. Book value per share

You will come across this term very often in investment discussions. Book value per share indicates what each share of a company is worth according to the company's books of accounts.
The company's books of account maintain a record of what the company owns (assets), and what it owes to its creditors (liabilities). If you subtract the total liabilities of a company from its total assets, then what is left belongs to the shareholders, called the shareholders' funds.
If you divide shareholders' funds by the total number of equity shares issued by the company, the figure that you get will be the book value per share.
Book Value per share = Shareholders' funds / Total number of equity shares issued
The figure for shareholders' funds can also be obtained by adding the equity capital and reserves of the company.
Book value is a historical record based on the original prices at which assets of the company were originally purchased. It doesn't reflect the current market value of the company's assets.
Therefore, book value per share has limited usage as a tool for evaluating the market value or price of a company's shares. It can, at best, give you a rough idea of what a company's shares should at least be worth.
The market prices of shares are generally much higher than what their book values indicate. Therefore, if you come across a share whose market price is around its book value, the chances are that it is under-priced. This is one way in which the book value per share ratio can prove useful to you while assessing whether a particular share is over- or under-priced.

3. Earnings per share (EPS)

EPS is a well-known and widely used investment ratio. It is calculated as:
Earnings Per Share (EPS) = Profit After Tax / Total number of equity shares issued
This ratio gives the earnings of a company on a per share basis. In order to get a clear idea of what this ratio signifies, let us assume that you possess 100 shares with a face value of Rs 10 each in XYZ Ltd. Suppose the earnings per share of XYZ Ltd. is Rs 6 per share and the dividend declared by it is 20 per cent, or Rs 2 per share. This means that each share of XYZ Ltd. earns Rs 6 every year, even though you receive only Rs 2 out of it as dividend.
The remaining amount, Rs 4 per share, constitutes the ploughback or retained earnings. If you had bought these shares at par, it would mean a 60 per cent return on your investment, out of which you would receive 20 per cent as dividend and 40 per cent would be the ploughback. This ploughback of 40 per cent would benefit you by pushing up the market price of your shares. Ideally speaking, your shares should appreciate by 40 per cent from Rs 10 to Rs 14 per share.
This illustration serves to drive home a basic investment lesson. You should evaluate your investment returns not on the basis of the dividend you receive, but on the basis of the earnings per share. Earnings per share is the true indicator of the returns on your share investments.
Suppose you had bought shares in XYZ Ltd at double their face value, i.e. at Rs 20 per share. Then an EPS of Rs 6 per share would mean a 30 per cent return on your investment, of which 10 per cent (Rs 2 per share) is dividend, and 20 per cent (Rs 4 per share) the ploughback.
Under ideal conditions, ploughback should push up the price of your shares by 20 per cent, i.e. from Rs 20 to 24 per share. Therefore, irrespective of what price you buy a particular company's shares at its EPS will provide you with an invaluable tool for calculating the returns on your investment.

4. Price earnings ratio (P/E)

The price earnings ratio (P/E) expresses the relationship between the market price of a company's share and its earnings per share:
Price/Earnings Ratio (P/E) = Price of the share / Earnings per share
This ratio indicates the extent to which earnings of a share are covered by its price. If P/E is 5, it means that the price of a share is 5 times its earnings. In other words, the company's EPS remaining constant, it will take you approximately five years through dividends plus capital appreciation to recover the cost of buying the share. The lower the P/E, lesser the time it will take for you to recover your investment.
P/E ratio is a reflection of the market's opinion of the earnings capacity and future business prospects of a company. Companies which enjoy the confidence of investors and have a higher market standing usually command high P/E ratios.
For example, blue chip companies often have P/E ratios that are as high as 20 to 60. However, most other companies in India have P/E ratios ranging between 5 and 20.
On the face of it, it would seem that companies with low P/E ratios would offer the most attractive investment opportunities. This is not always true. Companies with high current earnings but dim future prospects often have low P/E ratios.
Obviously such companies are not good investments, notwithstanding their P/E ratios. As an investor your primary concern is with the future prospects of a company and not so much with its present performance. This is the main reason why companies with low current earnings but bright future prospects usually command high P/E ratios.
To a great extent, the present price of a share, discounts, i.e. anticipates, its future earnings.
All this may seem very perplexing to you because it leaves the basic question unanswered: How does one use the P/E ratio for making sound investment decisions?
The answer lies in utilising the P/E ratio in conjunction with your assessment of the future earnings and growth prospects of a company. You have to judge the extent to which its P/E ratio reflects the company's future prospects.
If it is low compared to the future prospects of a company, then the company's shares are good for investment. Therefore, even if you come across a company with a high P/E ratio of 25 or 30 don't summarily reject it because even this level of P/E ratio may actually be low if the company is poised for meteoric future growth. On the other hand, a low P/E ratio of 4 or 5 may actually be high if your assessment of the company's future indicates sharply declining sales and large losses.

5. Dividend and yield

There are many investors who buy shares with the objective of earning a regular income from their investment. Their primary concern is with the amount that a company gives as dividends -- capital appreciation being only a secondary consideration. For such investors, dividends obviously play a crucial role in their investment calculations.
It is illogical to draw a distinction between capital appreciation and dividends. Money is money -- it doesn't really matter whether it comes from capital appreciation or from dividends.
A wise investor is primarily concerned with the total returns on his investment -- he doesn't really care whether these returns come from capital appreciation or dividends, or through varying combinations of both. In fact, investors in high tax brackets prefer to get most of their returns through long-term capital appreciation because of tax considerations.
Companies that give high dividends not only have a poor growth record but often also poor future growth prospects. If a company distributes the bulk of its earnings in the form of dividends, there will not be enough ploughback for financing future growth.
On the other hand, high growth companies generally have a poor dividend record. This is because such companies use only a relatively small proportion of their earnings to pay dividends. In the long run, however, high growth companies not only offer steep capital appreciation but also end up paying higher dividends.
On the whole, therefore, you are likely to get much higher total returns on your investment if you invest for capital appreciation rather than for dividends. In short, it all boils down to whether you are prepared to sacrifice a part of your immediate dividend income in the expectation of greater capital appreciation and higher dividends in the years to come and the whole issue is basically a trade-off between capital appreciation and income.
Investors are not really interested in dividends but in the relationship that dividends bear to the market price of the company's shares. This relationship is best expressed by the ratio called yield or dividend yield:
Yield = (Dividend per share / market price per share) x 100
Yield indicates the percentage of return that you can expect by way of dividends on your investment made at the prevailing market price. The concept of yield is best clarified by the following illustration.
Let us suppose you have invested Rs 2,000 in buying 100 shares of XYZ Ltd at Rs 20 per share with a face value of Rs 10 each.
If XYZ announces a dividend of 20 per cent (Rs 2 per share), then you stand to get a total dividend of Rs 200. Since you bought these shares at Rs 20 per share, the yield on your investment is 10 per cent (Yield = 2/20 x 100). Thus, while the dividend was 20 per cent; but your yield is actually 10 per cent.
The concept of yield is of far greater practical utility than dividends. It gives you an idea of what you are earning through dividends on the current market price of your shares.
Average yield figures in India usually vary around 2 per cent of the market value of the shares. If you have a share portfolio consisting of shares belonging to a large number of both high-growth and high-dividend companies, then on an average your dividend in-come is likely to be around 2 per cent of the total market value of your portfolio.

6. Return on Capital Employed (ROCE), and
7. Return on Net Worth (RONW)

While analysing a company, the most important thing you would like to know is whether the company is efficiently using the capital (shareholders' funds plus borrowed funds) entrusted to it.
While valuing the efficiency and worth of companies, we need to know the return that a company is able to earn on its capital, namely its equity plus debt. A company that earns a higher return on the capital it employs is more valuable than one which earns a lower return on its capital. The tools for measuring these returns are:

1. Return on Capital Employed (ROCE), and
2. Return on Net Worth (RONW).

Return on Capital Employed and Return on Net Worth (shareholders funds) are valuable financial ratios for evaluating a company's efficiency and the quality of its management. The figures for these ratios are commonly available in business magazines, annual reports and economic newspapers and financial Web sites.
Return on capital employed
Return on capital employed (ROCE) is best defined as operating profit divided by capital employed (net worth plus debt).
The figure for operating profit is arrived at after adding back taxes paid, depreciation, extraordinary one-time expenses, and deducting extraordinary one-time income and other income (income not earned through mainline operations), to the net profit figure.
The operating profit of a company is a better indicator of the profits earned by it than is the net profit.
ROCE thus reflects the overall earnings performance and operational efficiency of a company's business. It is an important basic ratio that permits an investor to make inter-company comparisons.

Return on net worth

Return on net worth (RONW) is defined as net profit divided by net worth. It is a basic ratio that tells a shareholder what he is getting out of his investment in the company.
ROCE is a better measure to get an idea of the overall profitability of the company's operations, while RONW is a better measure for judging the returns that a shareholder gets on his investment.
The use of both these ratios will give you a broad picture of a company's efficiency, financial viability and its ability to earn returns on shareholders' funds and capital employed.

8. PEG ratio

PEG is an important and widely used ratio for forming an estimate of the intrinsic value of a share. It tells you whether the share that you are interested in buying or selling is under-priced, fully priced or over-priced.
For this you need to link the P/E ratio discussed earlier to the future growth rate of the company. This is based on the assumption that the higher the expected growth rate of the company, the higher will be the P/E ratio that the company's share commands in the market.
The reverse is equally true. The P/E ratio cannot be viewed in isolation. It has to be viewed in the context of the company's future growth rate. The PEG is calculated by dividing the P/E by the forecasted growth rate in the EPS (earnings per share) of the company.
As a broad rule of the thumb, a PEG value below 0.5 indicates a very attractive buying opportunity, whereas a selling opportunity emerges when the PEG crosses 1.5, or even 2 for that matter.
The catch here is to accurately calculate the future growth rate of earnings (EPS) of the company. Wide and intensive reading of investment and business news and analysis, combined with experience will certainly help you to make more accurate forecasts of company earnings.

FBT (Use Company Car)

Last week, the Central Board of Direct Taxes issued a notification on how each perquisite provided to a salaried employee should be taxed. It is applicable with retrospective effect, from April 1 2009.

The guidelines cover every perk: home accommodation to gifts to educational benefits. The most important change, though, is taxation of car facilities.

Most other perks can be easily restructured and an employee has always borne tax on accommodation.

It is common for companies to provide either cars or reimburse expenses related to car use. The tax incidence can be much lower now if the company provides the car, than if the employer reimburses the expenses.

The amount of tax also depends on the engine capacity of the vehicle. It is lower if this is less than 1.6 litres.

Owned by employer

Surprisingly, the company-owned car is likely to be more beneficial for both employer and employee. For the employer, there is the benefit of depreciation when the vehicle is used for the purpose of business. For the employee, too, the incidence of tax will be lower this way.

If used entirely for business and the employer pays the running and maintenance expenses, there is no tax. But, to avail this, the employer must maintain detailed records showing the purpose of usage.

If used for personal purposes and the expenses paid by the employer, then the entire amount will be considered a perk, along with the normal depreciation charge (10 per cent), reduced by the amount recovered from the employee.

What if the vehicle is used partly for personal purposes? Then, Rs 1,800 a month would be added as income for the individual, for a car with engine capacity up to 1.6 litres. If of a higher capacity, the figure added would be Rs 2,400 a month. These figures would be increased by Rs 900 a month if a driver is provided.

If the employee pays the personal expenses for running and maintenance, then the taxable income will be Rs 600 a month and Rs 900 a month for the two engine capacities, respectively.

Owned by employee

Many would like to own the car and collect the running and maintenance expenses from the employer. However, the rules now make this more expensive. If the employee owns the car and the running and maintenance cost is paid by the employer and the entire use is for official purposes, then there is no perquisite value involved.

If use is partly for business and partly not, the calculation is slightly complicated. The actual amount paid by the employer less Rs 1,800 a month would be the amount considered as a perk for cars with an engine capacity below 1.6 litres.

This means if Rs 6,000 per month is spent (excluding driver) on a small car, then Rs 4,200 would be added to the income of an individual owning the vehicle. However, if the individual wants to claim a higher amount for official purposes, then detailed records showing official use and a certificate are needed.

The figure for the higher engine category is the actual expense less Rs 2,400 per month. Further, if a chauffeur is provided, the deduction (Rs 900) and expense (actual amount) figures would also go up accordingly.

Other vehicle

Even if the vehicle is not a car but another vehicle, say a two-wheeler owned by the employee, the rule applies. If any other vehicle is used partly for official and personal purposes, then the actual expenses by the employer, less Rs 900 a month, would be the figure used for valuing the perk.

If the expense is high, then in several cases, the amount on addition of a two-wheeler might be more than that of a car owned by the employer and provided for use to the employee.