Without having equity capital, it would be difficult for a company to expand, diversify or adopt technological advancement (modernization). In order to raise equity capital from Primary Markets, it has to go for issuance of the shares, which is also used as exit route by existing investors when a portion or full holding is offered along with share issue. Let us talk about various ways of raising equity capital through Primary Markets:-
Initial Public Offer (IPO): A Public Limited Company could raise equity capital by selling shares to public at a pre-determined price. The shares could be issued at face value or premium. This is called as public issue of shares for which it has to file a draft red herring prospectus(DRHP) with market regulator SEBI, detailing information about company, promoters, projects, existing performance, prospects, underwriters, obligations, pending legal cases, issue size. opening date, closing date and listing date. Such type of issues provide a wide holding of ownership, based on the over-subscription to issue and basis of allotment finalized, in consultation with stock exchange. This is costly route of raising capital due to underwriting. brokerage, commission, publicity, administrative and legal charges.
Book-building Route: Unlike IPO, issue price is discovered by way of a price band, which is determined based on the investor demand for the issue. A portion of issue has to be reserved for Retail Investors (application size up to Rs 2 lakhs). The remaining portion could be offered to Anchor Investors, Qualified Institutional Investors and High Net worth Individuals. Post approval of DRHP from SEBI, the collection of bids, basis of allotment, refunds, share issuance and listing process to be completed in 7 working days. This type of issue also involves underwriting, commission. publicity. administrative and legal costs.
Offer for Sale (OFS): The shares are largely sold to brokers and issue houses who in turn sell it to retail investors. Government, generally, sells its holding in Public Sector Undertakings through this route at a cut off price but allotment could takes place at higher price, based on the over-subscription. This method is cost effective and less time consuming, as third party takes over the responsibility.
Private Placement: The funds are raised through Primary Market by selling the shares to one investor or a small group of investors without resorting to underwriting. It hardly involves any costs and most effective way of procuring long term funds where there is a provision of lock-in period for exit. There is no need to follow the statutory route of going through regulator formalities. The offer is generally made to select group of known entities.
Rights Issue: Raising equity capital through existing shareholders of a listed company by issuance of shares in the proportion of shares held by existing shareholders on a record date. The issue size, proportion and record date is decided by Board of Directors. Rights issue is applicable for fully paid up shares held by shareholders. The rights issue remain open for a minimum period of 14 days and online applications could be made to get shares in demat form.
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