question_answer

Mr Sahil and Mr Rajesh are promoting a new company. They are not able to decide on, how to raise funds. Sahil is interested in a new issue through prospectus, while Rajesh wants a right issue. (i) As a financial manager, suggest Sahil and Rajesh for the appropriate decision. (ii) Discuss the methods by which securities are issued in the primary market.            

Answer:

(i) The issue of shares through prospectus is appropriate, as suggested by Sahil, as a new company cannot issue right shares because this can only be done by existing companies. (ii) There are various methods by which securities are issued in the primary market. They are: [a] Offer Through Prospectus/I PO Under this method, a company invites public to subscribe for its shares through issue of prospectus, which makes a direct appeal to investors-to invest in the company through an advertisement in the newspapers and magazines. [b] Offer for Sale Under this method, securities are not issued directly to the public, but are offered for sale through intermediaries like issuing houses or stock brokers. [c] Private Placement Private placement is the allotment of securities by a company to institutional investors and some selected individuals. It is considered beneficial because it helps to raise funds more quickly than a public issue. [d] Rights Issue This is a privilege given to existing shareholders to subscribe to a new issue of shares according to the terms and conditions of the company The shareholders are offered the right to buy new shares in proportion to the number of shares they already possess. This right is called the pre-emptive right of the existing shareholders. [e] e-IPOs When the public issue is made through an online system of stock exchange, it is known as e-IPO, i.e. electronic Initial Public Offer.