Methods of Raising Capital in the New Issues Market
Securities market has two segments called the primary market or the new issues market and the secondary market or the stock exchange. Primary market basically deals in new securities like shares, debentures etc. that are offered in the market for the first time. On the other side, secondary market provides facilities for the exchange of the existing securities after the new issue of securities is complete, in the primary market.
Primary Market comprises all the companies with their newly issued shares and debentures, and the people who would buy the same out of their savings. There are also intermediaries which aid in the process of raising funds from the people. Companies raise capital or funds from people, by offering their shares, debentures etc in the primary market. It not only helps in the flow of idle savings into active investments channels but also helps in the economic development of the country.
A public company can choose the following methods for marketing securities and for raising capital from the people
(i) Public Issue by Issuing a Prospectus:
Out of many this method is best and frequently used method of raising finance by companies. The prospectus to the public is issued by the company and it also invites offers for subscription to its shares and/or debentures. All the investors interested in securities apply for the same. You can also find the advertisements that are issued in leading newspapers.
(ii) Privileged Subscription:
If the existing public company wishes to issue further shares at any time:
- Later than the expiry of two years of its formation, or
- After one year of the first allotment of shares, whichever is earlier?
It is recommended then such shares must be offered to existing shareholders on a pro-rata basis since it is their right to get such shares. Within a specified period of time the company is allowed to allot unsubscribed shares to the public, if few shareholders do not exercise their privilege to buy such shares.
(iii) Private Placement:
Company is allowed to sell its securities privately to one or more financial institutions. It can also sell its securities to the brokers, who will sell them to their clients and associates. The company can get lot of money quickly through this approach to issue. This way company is also avoiding the risk of non-receipt of minimum subscription.