MBA (Finance) – IV Semester, Investment and Portfolio Management, Unit 1.3
Methods of Floating New Issues
The methods by which new issues of shares are floated in the primary market in India are: Public issue Rights issue Private placement.
Methods of Floating New Issues
The methods by which new issues of shares are floated in the
primary market in India are:
Public issue
Rights issue
Private placement.
Public Issue
Public issue involves sale of securities to members of the public.
The issuing company makes an offer for sale to the public directly of a fixed
number of shares at a specific price. The offer is made through a legal
document called Prospectus. Thus a public issue is an invitation by a company
to the public to subscribe to the securities offered through a prospectus.
Public issues are mostly underwritten by strong public financial institutions.
This is the most popular method for floating securities in the new issue
market, but it involves an elaborate process and consequently it is an
expensive method. The company has to incur expenses on various activities such
as advertisements, printing of prospectus, banks’ cosnwriting cosns, agentsees,
legaharges, etc.
Rights Issue
The rights issue involves selling of securities to the existing
shareholders in proportion to their current holding. As per section 81 of the
Companies Act, 1956, when a company issues additional equity capital it has to
be offered first to the existing shareholders on a pro rata basis. However, the
shareholders may forfeit this special right by passing a special resolution and
thereby enable the company to issue additional capital to the public through a
public issue. Rights issue is an inexpensive method of floatation of shares as
the offer is made through a formal letter to the existing shareholders.
Private Placement
A private placement is a sale of securities privately by a company
to a selected group of investors. The securities are normally placed, in a
private placement, with the institutional investors, mutual funds or other
financial institutions. The terms of the issue are negotiated between the
company and the investors. A formal prospectus is not necessary in the case of
private placement. Underwriting arrangements are also not required in private
placement, as the sale is directly negotiated with the investors. This method
is useful to small companies and closely held companies for issue of new
securities, because such companies are unlikely to get good response from the
investing public for their public issues. They can avoid the expenses of a
public issue and also have their shares sold.
