Question

State any four methods of floatation of new issues in the primary market.

Answer 1

Four methods of floatation of new issues are explained below:

i. Prospectus issue: The primary market allows companies to invite potential investors through the issue of a document called ‘prospectus’. The prospectus aims to provide all relevant information to the investors including the motive of the issue of securities, the upcoming projects of the company, the recent benchmark reached by the company etc. The prospectus is advertised in various forms of print media to gain the attention of investors. It is compulsory for a prospectus to follow the guidelines provided by SEBI and the Companies Act and have a listing in one stock exchange at least.

ii. Issue through intermediaries: Under this method, companies issue their shares to intermediaries such as broking houses, issuing agents etc. who sell the securities thereafter to the general public. This makes it easier for the company to raise funds and the cost of raising funds also gets minimised. This method can be considered one of the indirect methods of the issue of securities.

iii. Private placement: The securities are offered for sale to some predetermined individuals and institutional investors with high net worth. The company can make such an offer on its own or by taking the assistance of intermediaries. Such an offer allows the company to raise funds quickly as the involvement of issuing agents is minimised, and hence, the charges of brokerage, underwriting commission etc. are not borne by the company.

iv. Rights issue: Under rights issue, the company offers its new shares to its existing shareholders. Each existing shareholder is provided with a right to buy a certain number of shares. The shares offered to buy are proportionate to the existing shareholding of the investor in the company.