Question

show your understanding of Private placement and Renounciable rights issue as methods of raising fresh capital for companies and show their advantages and disadvantages when used to raise capital (100) 5 pages

Answer 1

Private Placement: A private placement is sale of shares of a company to one or more pre-selected investors or institutions.

Advantages of Private Placement:

• · Raising capital through Private placement allows you the flexibility of choosing your investors. You can place the shares to a strategic investor who has similar business interest and may provide business advice and assistance as well.
• · This also allows you to remain private and you are escaped from many regulatory requirements.
• · Usually the Private Investors stick for a longer time with their investments. So it also allows for consistency of the funds.
• · Raising capital through Private placement is less costly for the company as a lot of amount spent on underwriting fees, advertisement cost etc. is avoidable through this route.
• · It is also less time consuming.

Disadvantages of Private Placement:

• · There are very less number of investors who invest through private investment channel. Therefore, you may find it difficult to find investors suitable to your requirements.
• · The amount that can be raised through this mode is also limited.
• · Since, there is only a limited number of investors who invest through private investment channel, companies usually end up raising capital at a discounted rate through this channel.

Renounciable rights issue: A Renounciable rights issue is an offer issued by a company to their existing shareholders to Purchase additional share of the company in proportion to their existing shareholding at a discounted price. Renounciable rights are transferrable and can be bought or sold.

Advantages of Renounciable rights issue:

• · The right issue is offered to the existing shareholders of the company at the discounted price. This encourages them to purchase additional shares through Right issue.
• · Raising capital through Right issue is economical for the company as a lot of amount spent on underwriting fees, advertisement cost etc. is avoidable through this route.
• · There is no change in the ownership pattern of the company as since the shares are issued to existing shareholders in proportion to their existing shareholding
• · Approval of Board of Director through Board resolution is required. There is no need for approval of the shareholders.
• · The existing shareholders have right to renounce, accept or reject the offer for right issue.

Disadvantages of Renounciable rights issue:

• · Only a limited amount of Capital can be raised through the Renounciable rights issue as the existing shareholders of the company may not be interested to invest more in the company.
• · Rights issues are usually dilutionary in nature as since the right issue is offered at a discounted price, the value of shares falls after right issue.
• · Raising capital through right issues goes on to create a negative market sentiment for the company as it is assumed that the company is in dire need of funds.