Question

Mr. Navin, Director of PQR Ltd. desires to modernise its factory by making a public issue of shares. He wishes to approach stock exchange, while his financial Advisor, Mr. Harish prefers to approach JMD Consultants for the new public issue of shares. Please advise Mr. Navin whether to approach stock exchange or a consultant for new public issue of shares and why? Also advice about any two methods which the company may adopt for new public issue of shares.

Answer 1

Mr Navin should approach the consultant for the new public issue of shares because stock exchange deals in existing securities only. Hence it is not worthwhile to approach any stock exchange.

Following are the methods for the new public issue of shares:

(i) Issuing Prospectus

(a) In this method, company issues a prospectus containing details regarding its future plans, purpose for raising funds, past performance, details regarding promotes etc.

(b) Prospectus is provided to help the potential investors understand and evaluate the earning potential and risk element in the proposed investment.

(ii) Private Placement

(a) Here, the securities are allotted by a company to some select groups of persons. This method helps in raising capital more quickly than a public issue.

(b) This is done by small or new companies to avoid the cost on account of public issue.

(c) It is worth mentioning here that in the case of 'private placement’, there is no need to issue formal prospectus and the terms of the issue can be negotiated between the company and the potential investors.