Methods of Floatation in Primary Market
- Offer through Prospectus
Offer through prospectus is the most popular method of raising funds by public companies in the primary market. After a prospectus is issued, the public subscribes to shares, debentures, etc. This involves inviting subscription from the public through the issue of the prospectus. A prospectus makes a direct appeal to investors to raise capital, through an advertisement in newspapers and magazines. As per the response, shares are prearranged to the public. If the subscriptions are very high, the allocation will be done on lottery or pro-rata basis.
It provides such information as the reason for which the fund is being raised, the company’s background and upcoming projection, it’s a precedent financial performance, etc.
- Offer for Sale
Institutional investors like business enterprise funds, private equity funds, etc., invest in an unlisted company when it is very small or at an early stage. Under this method, securities are not issued directly to the public but are offered for sale through intermediaries like issuing houses or stock brokers.
Consequently, when the company becomes big, these investors sell their shares to the public, through the issue of the offer document and the company’s shares are listed in the stock exchange. This is called an offer for sale. The advantage of this technique is that the company need not be bothered about the printing and advertisement of the prospectus, allocation of shares, etc.
- Private Placement
A private placement is the allotment of securities by a company to institutional investors and some selected individuals. Public offers are an exclusive concern. The subsidiary cost of IPO’s lean to be very high. This is why some companies favor not to go down this route. It helps to raise capital more quickly than a public issue. They offer investment opportunities to a select few individuals. The private placement is the contradictory of a public issue, in which securities are made accessible for sale on the open market.
So the company will sell its shares to economic institutes, banks, insurance companies, and some select individuals. This will help them raise the funds competently, rapidly and efficiently. Such companies do not sell or offer their securities to the public at large. Financial institutions, mutual funds, investment bank, etc. subscribe to placement orders.
- Rights Issue
Usually, when a company is looking to expand or are in need of supplementary funds, they first turn to their present investors. This is a privilege given to existing shareholders to subscribe to a new issue of shares according to the terms and conditions of the company. So the present shareholders are given a prospect to further invest in the company. They are given the “right” to buy new shares before the public is offered the chance.
Such shares are marketable in the market by the owners. Successful companies assume this technique for fundraising. The rights issue is advantageous to the company as the cost of issue is minimum.
It stands for Electronic Initial Public Offer. A company proposing to issue capital to the public through the online system of the stock exchange has to enter into an agreement with the stock exchange. When a company wants to offer its shares to the public it can now also do so online. This is called an Initial Public Offer (IPO). An agreement is signed between the company and the related stock exchange known as the e-IPO. Issuing company also require to assign registrar to have electronic connectivity with the exchange.