As far as the Indian Capital markets are concerned, there are two methods to float new issues:
- Public issues, and
- Rights issues
Public issues:
A Prospectus is an Open invitation to the public at large to subscribe to the shares of that organization. It is a legal document and the most popular method for floating securities in the primary market (IPO). Shares are usually issued at a premium to the public at large. Premium means something extra above the face value of the shares. Public is ready to buy at a premium as they value the shares at such a high price. Many IPOs (public offering) have also gone flop – as in public did not subscribe to it as they felt that the offer price was very high – above its fair value. (We shall see more on this topic under the chapter: Valuation)
Rights issues:
Rights issues are issued by companies whose shares are normally already listed on stock exchanges. Rights issues is a Right of the existing shareholders to buy new shares as per the proportion of currently held shares by them (as per their current holding)
Example: 8:5 – meaning if you hold 8 shares, then you have the right to buy 5 more shares in this Right Issues if you wish to buy.
Private Placement:
The private placements can be made by a company to the investors at any agreed price and quantity as such private equity issues are not regulated by SEBI. The Securities and Exchange Board of India (SEBI) has effected several reforms in the New Issue Market. These reforms seek improved disclosure standards, prudential norms and simplification of issue procedures.
An unlisted company which wants to raise equity funds but is not yet prepared to make an IPO may place privately its equity or equity related instruments with one or more sophisticated investors such as financial institutions, mutual funds, venture capital funds, banks etc.