Here we have discussed three methods of offering securities to the investors.
Initial Public Offering (IPO)
Public offering refers to the issuance of shares through the investment bankers to the large number of investors. When the new or privately held companies offer securities for the first time to public, it is termed as initial public offering. Under this method, the company who wants to raise fund issue prospectus to the mass public scattered throughout the country inviting offers for subscription. The prospectus issued by the company must be drafted in accordance with the guidelines of the security board and the provision of the company act. Interested investors having will can apply for the securities. Once the company received subscription from the investors, it makes allotment of securities.
In public offering, investment banker played important role as a mediator between issuing company and investors. It also performs the role of underwriter.
Private Placement
Private or direct placement refers to the method of offering shares directly to few or a group of individual investors or institutional investors instead of offering to public. Companies needing urgent capital directly negotiate with few individual or institutional investors over the terms of offering and sell their shares to them. It takes less time to raise capital and also eliminate the middleman’s commission (i.e. flotation cost). This method is often used to issue debt instruments and/or preferred stocks.
Right Offering
Right offering refers to the selling of new shares of common stocks to the existing shareholders on pro-rata basis at subscribed price within particular time period instead of selling to new investors. The price at which the stocks are offering is generally lower than that of market price of that stock. It provides right but not obligation to the existing shareholders to buy additional stocks at a discount price. It is more popular way of issuing equity shares as it eliminates the flotation costs and also protects existing shareholders from dilution in controlling power.