Institutional investors step up due diligence in investee companies

Qualified Institutional Investors, especially Asset Management Companies (AMCs), have stepped up their due diligence prior to investing in companies through qualified institutional placements and also in the case of initial public offerings.

“The business diligence being done by the institutional investors have been very rigorous,” said Bhavesh Shah, Managing Director, Equirus Group, which recently closed three QIPs for MAS Financial, Allcargo Gati and Carysil that collectively raised ₹795 crore. It was also involved in the ₹418 crore-IPO of Dee Development.

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While institutional investors, private equity firms and AMCs are flush with funds that have to be deployed, they are taking the time to thoroughly vet the companies before investing. “Investors are doing a lot of due diligence before they put the money. They are not writing cheques because they have the money,” Shah added.

“As the fund industry in India is becoming bigger, the players are becoming more rigorous in their diligence and very process-driven. The diligence pans across from heavy interactions with the investee companies for deeper understanding of the business to even doing customer calls and channel checks,” Shah said.

Another investment banker who has handled several smaller QIPs said every deal is taking time and effort because investors now want to get deeper into the business of the target companies. “Mutual funds especially, have a fiduciary responsibility towards their unitholders the majority of whom are retail investors. They have the pressure to deploy funds, but they are undertaking massive scrutiny.”

Qualified institutional placements have become a favoured mode of fundraising by listed companies over the last two-three years, with a good appetite for Indian equities among domestic and foreign institutions. Last year, $9.4 billion was raised through QIPs and this year the industry expects the figure to cross $15 billion.

A major reason for the increased due diligence by investors is the higher valuations that Indian companies are attracting. The regulations have also become more stringent with the Securities and Exchange Board of India insisting on specifics with regard to the objects of the issue and use of the proceeds.

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From a company’s standpoint, QIPs allow them to have a diversified and good-quality shareholder base, who stay invested for a long time.