a. A listed firm could be benefited through rights issue in the
following ways :
- Lesser underwriting costs
- Lesser regulatory requirements as compared to IPO or FPO
- Faster turnaround time as compared to IPO or FPO
However, rights issue is an option given to the existing
shareholders to purchase shares of the company. It is possible that
shareholders may not subscribe to sufficient number of shares to
meet the company's funding requirements. Shares are issued at a
discount, since the option is given to the existing shareholders.
This could lead to dilution and decrease in EPS.
b. Advantages and dis-advantages of private placement in
comparison to the rights issue
Advantages :
- Generally instituitional investors and HNIs participate in
private placements. Company goes through series of negotiations
before concluding the private placement. Hence, to a great extent,
company has the opportunity to understand and align both parties'
objectives and requirements
- Investments are done for a long-time horizon and also from a
strategic objective in most cases
- Participation of instituitional investors can boost
confidence/sentiments of the general market - especially if
investors are marquee names
- As the amount of equity stake involved could be significant,
private placements are generally done at premium in comparison to
the ongoing market rates (however, this may not hold true if the
company is having funding issues in general)
- Lower transaction cost, quicker turn-around time
Dis-advantages :
- Private placement would result in equity dilution of existing
shareholders
- Difficulty in finding suitable investors - marquee/anchor
investors would have higher negotiating power in dictating terms of
the deal
- If the investment stake is significant and depending on the
negotiating terms, investors may demand for representation in board
(common in private equity investment)