Methods for raising Finances

The market for financial securities may be divided into two segments: the primary market and the secondary market. New issues are made in the primary market whereas outstanding issues are traded in the secondary market.

There are three ways in which a company may raise finances in the primary market: (1) public issue, (2) rights issue, and (3) private placement or preferential allotment.

Public issue involves sale of securities to the members of the public. The first public offering of equity shares of a company, which is followed by a listing of its shares on the stock market, is called the initial public offering (IPO). Subsequent are called seasonal offerings.

Initial Public Offering: The decision to go public or more precisely the decisions to make an IPO so that that the securities of the company are listed on the stock market and publicly traded is a very important decision which calls for carefully within the benefits against costs.


* Access to a larger pool of capital
* Respectability
* Lower cost of capital compared to private placement.
* Liquidity Costs
* Dilution
* Loss of flexibility
* Disclosures and accountability
* Periodic Costs.

Eligibility for IPOs: An Indian company, excluding certain banks, and infrastructure companies can make an IPO if it satisfies the following conditions:

1. The company has certain track profitability and a certain minimum net worth.
2. The securities are compulsorily listed on a recognized stock exchange which means that a certain minimum percent of each class of securities is offered to the public.
3. The promoters group (promoters, directors, friends, relatives, associates etc) is required to make a certain minimum contribution to the post issue capital.
4. The promoters’ contribution to equity is subject to a certain lock-up in period.

Principal Steps in an IPO: A public issue involves sale of securities to the members of the public. It entails a fairly elaborate process involving the following steps after the proposed issue is approved by the board of directors and shareholders.

1. Appoint the lead manager /s
2. Appoint other intermediaries like co-mangers, underwriters, bank, brokers, and registrars.
3. Prepare the prospectus and file the same with the Registrar of Companies and SEBI.
4. Print the prospectus and dispatch the same to brokers.
5. Make the statutory announcements.
6. Collect and process the applicants
7. Establish the liability of underwriters.
8. Allot shares
9. Get the issues listed.

The cost of an IPO is normally between 6 and 12 per cent spending on the size of the issues and the level of marketing effort. The important expenses incurred for public issue are: underwriting expenses, brokerage, fees for the managers and registrars, printing and postage expenses, advertising and publicity expenses, listing fees, as stamp duty.

Seasoned offering: For most companies their IPO is seldom their last public issue. As companies grow, they are likely to make further trips to the capital market with issues of debt and equity. These issues are likely to be public issues offered to investors are large or rights or private placements or preferential allotment.

The procedure for a public issue by a listed company seasoned offering is similar to that of an IPO. Hence all the steps involved in an IPO are applicable to a public issue by a listed company. However, a public issue by a listed company is subject of fewer regulations when compared to an IPO (expect when the post issue net worth grows to more that five times the pre-issue net worth). This is evident from the following:

A public issue by a company which has been listed on a stock exchange for at least three years and has a track record of dividend payment for at least three immediate preceding years does require the promoters’ contribution, provided the relevant information is disclosed in the offer document.