Page 47 - DMGT405_FINANCIAL%20MANAGEMENT

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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