Question

Explain the methods used to issue new securities (in your own words at least 150 words)

Answer 1

1)Public issue: When a company raises funds by selling (issuing) its shares (or debenture / bonds) to the public through issue of offer document (prospectus), it is called a public issue.

Initial Public Offer (IPO): When a (unlisted) company makes a public issue for the first time and gets its shares listed on stock exchange, the public issue is called as initial public offer (IPO).

Follow-on public offer (FPO): When a listed company makes another public issue to raise capital, it is called follow-on offer (FPO).
2) Offer for sale: Institutional investors like venture funds, private equity funds etc., invest in unlisted company when it is very small or at an early stage. Subsequently, when the company becomes large, these investors sell their shares to the public, through issue of offer document and the company’s shares are listed in stock exchange. This is called as offer for sale. The proceeds of this issue go the existing investors and not to the company.
3) Private Placement: The sale of securities to a relatively small number of select investors for raising capital. Investors involved in private placements are usually large banks, mutual funds, insurance companies and pension funds. Private placement is the opposite of a public issue, in which securities are made available for sale on the open market.
4) Rights issue (RI): When a company raises funds from its existing shareholders by selling (issuing) them new shares / debentures, it is called as rights issue. The offer document for a rights issue is called as the Letter of Offer and the issue is kept open for 30-60 days. Existing shareholders are entitled to apply for new shares in proportion to the number of shares already held.
5)Bonus Issue : the company issues new shares to its existing shareholders. As the new shares are issued out of the company’s reserves (accumulated profits), shareholders need not pay any money to the company for receiving the new shares.

6)Sale through Intermediaries:In this method, a company appoints intermediaries like stock brokers, commercial banks and financial institutions to assist in finding market for the new securities on a commission basis. The company supplies blank application forms to each intermediary who affixes his seal on them and distributes the among prospective investors. Each intermediary gets commission on the amount of security applications bearing his seal. However, intermediaries do not guarantee the sale of securities.

7) Sale to Inside Coterie:A company may resort to subscription by promoters and directors. This method helps to save the expenses of public issue. Generally, a percentage of new issue of securities is reserved for subscription by the inside coterie who can in this way share the future prosperity of the company.