Methods of Issuing Shares
The following are some of the key methods of issuing shares:
- Private Placement.
- Offer for Sale.
- Sale through Intermediaries.
- Sale to Inside Circle.
- Sale through Managing Brokers.
- Privileged Subscriptions.
- Public Issue or Initial Public Offer (IPO).
Read about Importance of Economic System in business Environment.
Private Placement
In this method, the firm issuing shares sells its shares privately to one or more institutional agents who then sell them to their clients and associates. This method is advantageous and cost-effective as the firm obtains the money quickly, and there is no risk of not receiving the minimum subscription.
However, private placement has some drawbacks. The financial institution may demand a large discount or other conditions for the private purchase of shares. It may also retain the securities instead of selling them on the stock market.
This deprives the public of the option to purchase shares of a reputable firm and may lead to the centralization of the firm's ownership. Private placement is particularly suitable for small issues, especially during an economic downturn.
Also, read about Economic Fiscal Policies.
Offer For Sale
Under this method, the issuing firm gives or agrees to allot the shares to an issue house at an agreed price. The issue house or financial institution publishes a document called an 'offer for sale'. It offers individuals debentures or shares for sale at higher prices. The application form is attached to the offer document. After receiving applications, the issue house allots the shares to the applicants who become the direct allottees of the debentures or shares.
This method saves the firm from the expense and trouble of selling shares directly to the investing public. It assures that the entire issue is sold and saves the stamp duty payable on the transfer of shares. However, the entire premium received is kept by the offeror and not the issuing firm.
Read about Costing for Decision Making.
Sale Through Intermediaries
In this method, a firm appoints mediators like commercial banks, financial institutions, and stockbrokers, to help find a market for the new shares on a commission basis. The firm feeds blank application forms to each intermediary who stamps his seal on them and distributes them among prospective investors. Each intermediary receives a commission on the amount of share applications bearing his seal. However, intermediaries do not guarantee the sale of shares.
This method is useful when a firm has offered 49% of the issue to the general public, which is necessary for listing shares. The rate of sale of shares may be very slow, and there is uncertainty about the sale of the entire lot of shares offered through arbitrators. However, this method saves the administrative problems and costs involved in a direct offering of shares to the public.
Sale to Inside Circle
A firm may resort to subscription by directors or advocates. This method helps to save the costs of public issues. Generally, a percentage of a new issue of shares is reserved for subscription by an inside circle who can thus share the future profits of the firm.
Sale through Managing Brokers
The sale of shares through managing brokers is becoming popular, especially among new companies. Managing brokers advise companies about the appropriate timing and terms of the issue of shares. They assist the companies in pre-issue canvassing, the issue of a prospectus, getting the firm listed in the stock exchange, and publicity. They also enlist the support and cooperation of share brokers.
Privileged Subscriptions
When an existing firm wants to issue further shares, it is required to offer them to existing shareholders on a prorata basis. This is known as the 'Rights Issue'. The sale of shares by rights issues is simpler and cheaper compared to sales through the prospectus.
However, the existing shareholders will prefer the new issues only when the past performance and future prospects of the firm are good. An existing firm may also issue Bonus Shares for free to the existing shareholders by capitalizing its surplus and reserves.
Public Issue or Initial Public Offer (IPO)
Under this method, the firm issues a prospectus to the public, inviting applications for the subscription. Interested investors apply for the securities they are willing to buy. Advertisem*nts are also published in major newspapers. Under the Indian Companies Act, it is mandatory for public limited companies to file a statement or a prospectus in lieu of a prospectus with the Registrar of Companies.
Once subscriptions are received, the firm allocates the shares keeping in view the prescribed needs. The prospectus must be drafted and issued in accordance with the provisions of the Companies Act and the guidelines of SEBI. Failure to do so may lead to criminal and civil liabilities.
Public issue or direct selling of shares is the most common method of selling new issues of shares. This method helps a firm to raise funds from a large number of investors widely scattered throughout the country. This method ensures a wider distribution of shares, thereby stopping the concentration of economic power in a few hands.
However, this method is quite cumbersome, involving numerous administrative issues. Also, this method does not guarantee the raising of sufficient funds unless the issue is underwritten. Therefore, this method is suitable for well-established companies that need to raise large capital and can afford the high costs of a public issue.
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