Rights issue and private placements

A rights issue involves selling securities in the primary by issuing rights to the existing shareholders, When a company issues additional equity capital, it has to be offered in the first instance to the existing shareholders on a pro rata basis. This is required under Section 81 of the Companies ct, 1956. The shareholders however may be a special resolution forfeit this right, partially or fully to enable a company to issue additional capital the public.

Procedure for rights issue: A company making rights issue sends a letter of offer along with a composite application form consisting of four forms (A,B,C and D) to the shareholders. Form A is meant for the acceptance of the rights and application of additional shares. This form also shows the number of rights shares the shareholders is entitled to. It also has a column through which a request for additional shares may be made. Form B is to be used if the shareholder wants to renounce the rights in-favor of someone else. Form C is meant for application by the renouncees in whose favor the rights have been renounced by the original allotee, through Form B. Form D is to be used to make a request for split forms. The composite application form must be mailed to the company within a specific period which is usually 30 days.

Private Placement or Preferential allotment: In private placement, funds are raised in the primary market by issuing securities privately to some investors without resorting to underwriting. The investors in this case may be financial institutions, commercial banks, other company’s shareholders of promoting companies, and friends and associates of the promoters.

The merits of private placement are: (1) The process of raising funds is fairly simple. The elaborate procedure required in the case of a public issue is more or less by passed. (2) The issues cost is minimal. (3) In the case of a debenture issue, negotiated directly between the issuing company and the few investors, there may be greater flexibility with respect to terms and conditions. The disadvantageous of private placement are: (1) The Quantum of funds that can be raised may be rather limited, (2) The cost of capital of funds raised by way of private placements may be somewhat higher.

Private Placement of Debentures: Private placement of debentures has become very popular in recent years. The principal buyers of such debentures have been mutual funds, insurance companies, financial institutions, Army Group Insurance, Navy Group Insurance, Air Group and so on.

The phenomenal growth of private placement of debentures may be attributed to the following Factors:

Accessibility: Almost every company uses the private placements route. There is no need for credit ratings.

Flexibility: In private placements, there is greater flexibility in working out the terms of the issue.

Speed: A private requires much less time than a public issue.

Lower Issue costs: The costs of a private placement are substantially less.

How do the three methods compare: How do the three methods compare broadly in terms of the amount that can be raised, the cost of issue, dilution of control, degree of under-pricing, and market perception. Below points presents a summary comparison for equity issue. As far as a debt issue is concerned, dilution of control is non-issue and the market perception is positive under all the methods.

Summary Comparison to three Methods

Amount that can be raised>
Large /

Cost of issue>

Dilution of control>

Degree of under-pricing
Large /

Market Perception