What are the methods of floatation in primary market?
Answers
SOLUTION :
The methods of floatation in primary market are :
(i) Offer through prospectus :
Under this method company invites the prospective investors for the securities by issue of a prospectus. Applicants send their prescribed application along with cheques / drafts or cash. After scrutiny of the application form securities ( shares and debentures) are allotted to the applicant under an allotment policy decided in consultation stock exchange and lead managers . Remaining balance amount of securities is also paid by allottees as and when demanded by the company.
The issues may be underwritten and are required to be listed on at least one stock exchange . The contents in the prospectus must be as per the appropriation sections of companies Act, 2013 and SEBI disclosure and Investors Protection guidelines in effect.
(ii) Offer for sale :
Many companies do not directly offer their shares and debentures to the public sell their shares and debentures to an ‘issue house’ with the understanding that the party on the house would present the same to the public. The main reason for using an offer for sale through issuing house is that a company saves underwriting expenses and in addition it obtain the expertise of the issuing house.
It may be noted that the responsibility of the company, its directors and promoters remains the same, rather in addition, the ‘Issuing house’ incurs it's own liability.
(iii) Private Placement :
Under private placement an intermediary ( one or more ) buys the entire lot of securities from the company at a mutually settled fixed price and are sold to selected clients at a higher price. Securities are not offered to public at large. It is a cost effective finance raising method as company is not required to issue of prospectus. It is saved of statutory expenses like underwriting commission, brokerage, managers fee , advertisement expenses, mailing of allotment and non allotment letter, processing cost , etc. For small companies private placement is most suitable.
(iv) A Right issue :
It is not a public offer or invitation as it is made to the existing shareholder and not even to a section of public. A right issue of securities need not to be accompanied with the prospectus but a letter of offer is sent to the existing shareholders. New shares are issued in the proportion of the existing shares held by the shareholders. The issue offers the shares by a company to its members with right of renunciation in favour of other parties they wish for
(v) E - IPO -
It refers to issuing securities through the online system of stock exchanges. The company has to enter into an agreement with the stock exchange. Stock brokers registered with the SEBI are required to be appointed for accepting applications and placing orders with the company. Issuing company also need to appoint registrar to have electronic connectivity with the exchange.
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