Page 3 - Lesson Note 2

shares, debentures, loans and deposits. Funds raised may be for setting up new projects,

expansion, diversification, modernization of existing projects, mergers and takeovers etc.

Methods of Floatation There are various methods of floating new issues in the primary market

1. Offer through Prospectus: Offer through prospectus is the most popular method of raising

funds by public companies in the primary market. This involves inviting subscription from the
public through issue of prospectus. A prospectus makes a direct appeal to investors to raise

capital, through an advertisement in newspapers and magazines. The issues may be

underwritten and also are required to be listed on at least one stock exchange. The contents of
the prospectus have to be in accordance with the provisions of the Companies Act and SEBI

disclosure and investor protection guidelines.

2. 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. In this case, a

company sells securities at an agreed price to brokers who, in turn, resell them to the investing

public.

3. Private Placement: Private placement is the allotment of securities by a company to
institutional investors and some selected individuals. It helps to raise capital more quickly than

a public issue. Access to the primary market can be expensive on account of various mandatory

and non mandatory expenses. Some companies, therefore, cannot afford a public issue and
choose to use private placement.

4. 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.

5. e-IPOs: A company proposing to issue capital to the public through the on-line system of the

stock exchange has to enter into an agreement with the stock exchange. This is called an Initial

Public Offer (IPO). SEBI registered brokers have to be appointed for the purpose of accepting
applications and placing orders with the company. The issuer company should also appoint a

registrar to the issue having electronic connectivity with the exchange. The issuer company can