Depending on the size, nature and capital requirements of the company, there are three different methods of flotation. Existing shares in the company are admitted to trading on a stock market, but no new shares are issued to stock market investors in the company.
Stock Market Introduction
This method of flotation is often suitable if your company has no short-term need to raise funds or extend the company’s existing share ownership more widely. Joining a stock market via an introduction is also likely to be the most cost-effective method of floating the company on a stock market.
Stock Market Placing
The company will issue new shares to a small group of stock market investors, usually these will be institutional investors. This will be done prior to the company being admitted to trading on a particular stock market.
In a stock market placing the company will have greater discretion over the number and the nature of who your new shareholders are. A placing also provides the company with the opportunity to raise capital on the chosen stock market at relatively low cost.
In undertaking a placing it is more likely that your company will find both the process of flotation and the costs incurred less onerous than undertaking an IPO (Initial Public Offering).
IPO
IPO stands for Initial Public Offering. There is often confusion about this term as it is sometimes used (incorrectly) as a term to describe any type of company flotation on the stock markets.
An IPO describes a flotation in which shares in your company will be offered to the public, thereby attracting a wide range of shareholders. IPO’s tend to be the most expensive method of floating a company. This method of stock market flotation is most common for large companies raising significant amounts of money.
Initial issues are those floated by new companies for the first time, while further issues are subsequent issues floated by the existing companies. Issues can be classified as those given for cash, for exchange of technical know-how, exchange of shares of another company or exchange for any other services rendered by the agencies or promoters.
The placement of the issues may be through (i) prospectus (ii) offer of sale (iii) private placement (iv) rights issue
Offer through prospectus: Offer through prospectus involves inviting subscription from the public through issue of prospectus. The price at which the securities are offered for sale is at the face value of the share in the case of new companies and may be at a premium or discount in the case of old companies.
The prospectus is a document, which is a notice, or circular or advertisement inviting offers for subscription or purchase of any shares or debentures from the public. The prospectus should contain authentic data such as name of the company, address, activities, board of directors, location of industry, authorized, subscribed and paid up capital, dates of opening and closing of the subscription list, names of brokers and underwriters etc. and should be delivered to the Registrar of Companies for registration. The draft of the prospectus should be approved by board , solicitors, lending financial institutions and the stock exchanges in which they are to be listed.
Offer of sale: This method consists of outright sale by the company instead of offering shares to the public to through intermediaries such as issuing houses or share brokers. The company sells shares en bloc at an agreed price to brokers or merchant bankers who in turn resell them to the investing public. Offer of sale of shares takes place in the case of existing shareholders purchasing en bloc and then reselling them to the public. Similarly, foreign collaborators or promoters may sell their shares to the Indian public through offer of sale which may be either through brokers or through prospectus.
Private Placement: Private placement is defined as sale by the issuing house or broker to his own clients of securities previously purchased by him. The issuing houses or financial intermediaries buy them outright with the intention of placing them with their clients afterwards. The brokers would make their profit in the process of reselling to the public. This method of private placement is used to a limited extent in India but is very popular abroad.
Before the issues are placed in the market by the promoters, they sell to their friends and well wishers as the Govt. guidelines require a minimum contribution from the promoters and their friends. Private placement is also made by bargaining with financial institutions for their share of contribution. Private placement in India is mostly of equity or equity related instruments of unlisted companies and debt instruments of listed companies.
Appeal of private placement: The phenomenal growth of private placement of debt may be attributed to the following reasons.
- Accessibility: Private placement market can accommodate issues of smaller size whereas the public issues market does not permit an issue below a certain minimum size.
- Flexibility: There is greater flexibility in working out the terms of issue. e.g. When a non-convertible debenture issue is privately placed, a discount may be given to institutional investors to make the issue attractive. There may be more latitude to renegotiate the terms of the issue and even roll over the debt.
- Speed: A private placement requires lesser time, perhaps a month or two, as the elaborate procedure followed in a public issue is largely bypassed.
- Lower issue costs: The issue cost for a private placement is substantially less as a public issue entails several statutory and non- statutory expenses associated with underwriting, brokerage, printing, mailing, announcements, promotion and so on, whose costs are quite high.
Institutional investors, before participating in a private placement, need to look into a number of factors like the net worth of the company, the interest cover, the level of profit before tax, the asset cover, the debt equity ratio, the dividend record, the percentage of unsecured deposits/borrowings,
The price history of the company’s stock, and the existence of carried forward loss.
Rights Issue: is an offer with a preemption right to the shareholder of existing companies to contribute to the share capital or its debt capital in the form of debentures. An existing company can issue rights to augment its equity base, if necessary. These are offered to the existing shareholders in a particular proportion to their existing share ownership. The rights are themselves transferable and saleable in the market.
Under the Companies Act, where a company increases its subscribed capital by the issue of new shares either after two years of its formation or after one year of the first issue of shares whichever is earlier, these have to be first offered to the existing shareholders with the right to reserve them in favour of a nominee.
A company issuing rights is required to send a circular to all existing shareholders. The circular letter should provide information on how the additional funds would be used and their effect on the earning capacity of the capital. The company may normally give a time limit of at least 1 month or two to shareholders to exercise their exercise their right before it is offered to the public. Rights may also be offered through underwriters. If the company is doing well, rights will be received well by the shareholders and the need for underwriting may not be felt.
Main condition is that the shareholders be given an opportunity to apply for additional shares. If the rights are not fully taken up, the balance is to be distributed among the applicants for additional shares. Any balance still left over after making such allotment is required to be disposed of by the company in the market at the ruling price or the issue price.
Capital Market
The capital market is a market in which the securities with maturities of more than one year are bought and sold. The capital market refers to the market for long term securities, such as corporate stocks and bonds, for financing long term assets. The major players being Corporates, Banks, Financial Institutions, Mutual Funds etc. The capital market is further classified as follows:
Primary Capital Market
The ‘primary capital market’ is one in which new issues of common stock, bonds and preferred stocks are sold by companies. The proceeds raised in this market is the new capital funds.
Secondary Capital Market
The secondary capital markets are also called ‘stock markets: In the secondary markets, the outstanding issues are permitted to trade. In this market, a stock or bond issue which has already been sold to the public, and it is traded between current and potential owners. The proceeds from a sale in the secondary market do not go to the issuing organization but to the current owner of the security. The stock markets are classified as follows:
Stock Exchanges
The Stock Exchanges will have a physical location where stocks buying and selling transactions take place in the stock exchange floor.
Over the Counter Exchange
Where shares, bonds, and money market instruments are traded using a system of computer screens and telephones is called ‘Over the Counter Exchange
Capital market is the barometer of the economy and represents the macro economic affairs of the country. It is an index of economic and industrial development of the country. Capital market discounts the future and it is reflection of future of the economy. In the long run it is a true measure of the health of any economy.
