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Unit 3: Sources of Finance



                 liaison with the other intermediaries, and statutory bodies like SEBI, Stock Exchange and  Notes
                 the Register of Companies (ROC) and finally ensure that securities are listed on the Stock
                 Exchange.
                The other intermediaries involved in  the public  issue of  securities  are  underwriters,
                 registrars, and bankers to the issues, brokers and advertising agencies. It also involves
                 promotion of the issue, printing and dispatch of prospectus and application form, obtaining
                 statutory clearances, filing the  initial listing  application,  final  allotment  and  refund
                 activities. The cost of issue ranges between 12 – 15% of the issue size and may go up to 20%
                 in adverse market conditions.

            3.3.2  Rights Issue

            As per Section 81 of the Companies Act, 1956, when a firm issues additional equity capital it has
            to first offer such securities to the existing shareholders in a prorate basis. The company must
            give notice of maximum 14 days to each of the equity shareholders giving him the option to take
            the shares offered to him by the company against payment of specified money per share. The
            shareholder unless the articles otherwise provide, have the right to renounce the offer, in whole
            or in part, in favour of some others who need not be a member of the company. The cost of
            floating right issue is comparatively less than the public issue. Since marketing costs and other
            public issue expenses are avoided as the offer is made to the existing shareholders. The rights
            issue is also priced lower than the public issue.

            3.3.3  Private Placement
            The  private placement method involves direct selling  of securities  to a  limited number  of
            institutional or high net worth investors. This avoids delay involved in going public and also
            reduces  the expenses involved in public issue. The company  appoints a merchant banker to
            network with the institutional investor and negotiate the price of the issue. The major advantages
            of private placement securities are:
                Easy access to any company
                Fewer procedural formalities
                Access to funds is faster
                Lower cost involved in issues
                Securities can be custom-tailored for firms with special problems or opportunities.

            3.3.4  Bought out Deals
            Bought out is a process whereby a investor or group of investors buy out a significant portion of
            the equity of an unlisted company with a view to sell the same to public within an agreed time
            frame. The company places the equity shares, to be offered to the public with a sponsor or the
            Merchant Banker. At the right time, the shares are off loaded to the public through the OTCE I
            route or by way of public issue and the funds reach the company without much delay. Further,
            it affords greater flexibility in terms of issue and matters relating to offloading. Major advantages
            of entering into a bought out deal are:
                Companies both existing and new, which do not satisfy conditions laid down by SEBI for
                 premium issues, may issue at a premium through this route.
                The procedural complexities are reduced, and funds reach faster upfront. Added to this
                 there is significant reduction in issue cost.
                An advantage accruing to the investor is that the issue price reflects the company’s intrinsic
                 value.




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