Why companies prefer GDRs to QIPs??

The last two weeks have seen many companies raise capital but not via qualified institutional placement (QIPs) which was the flavor of the last season but via global depositary receipt or GDR’s and one company even did an american depositary receipt (ADR). So why has this route become a favorite amongst companies and what is the response like from institutional investors across the world.

Sumant Sinha, COO of Suzlon Energy, which closed its GDR issue last week of a little over USD 100 million and also did almost a USD 100 million of an non-convertible debentures (NCD), spoke on the issue.

"If one looks at GDR versus QIPs, there is more broad based interest for QIP than it is for GDR. The GDR has a bit of a lock-in issue involved as well where as a QIP does not. It is really a question of which instrument the company has regulatory approvals for,” Sinha said.

Here is a verbatim transcript of the exclusive interview with Sumant Sinha on CNBC-TV18. Also watch the accompanying video.

Q: What is this new trend of GDR versus QIP and why do companies prefer to do a GDR as opposed to raising money through a QIP?

A: I can only comment as regards us, in our case we did not have enabling resolutions in order to do a QIP and so therefore we had to go forward and do a GDR, which is something that was possible from a regulatory standpoint. So it was really just that and nothing else beyond that, if you look at GDR versus QIPs you might argue that there is more broad based interest for QIP than its for GDR. So it might just be a company specific thing which is more of a regulatory issue than anything else.

Q: A lot of people who are bankers that I was speaking to also told me that, those that had QIP approvals from last year proceeding to the time when Sebi changed the pricing guidelines prefer not to use those approvals and are instead going the GDR route, so you see some rationale there?

A: To be honest, I cant, because it appears to me that the QIP instrument is a very flexible one and you can pretty much address the investors that you need to. If you were to do an ADR that’s a different matter because that is probably listed on the US stock markets and broadens the investor base to some extent. But in GDR and QIP I really cant see that much of a difference with respect to the investor base. The GDR has a bit of a lock in issue involved as well where as a QIP does not. So, on the other hand not all investors can buy into QIPs, so there is a little bit of a tradeoff between QIP and GDR, but it really is a question of which instrument the company has regulatory approvals for and there is not that much in it between the two to be honest.

Q: You said that if broad base is the investor base, so was there some sense that the appetite amongst the regular institutions that are usually part of a QIP was waning to some extent and therefore you had to reach out to investors that didn’t have access let’s see via a QIP but a GDR to invest in companies like yours?

A: I would not really say so because the difference is not that large and ultimately there are dedicated investors who invest in India and they have the facility to invest in GDR or QIP and they form the core part of the investor base. So to be honest there isn’t that much of a difference between those instruments.