The term capital Market refers to facilities and institutions arrangements through which long-term funds; both debt and equity are raised and invested. The Capital Market consists of development banks, commercial Banks and stock exchanges. The Capital market can be divided into two parts (a) Primary Market (b) Secondary Market
Methods of Floating New Issues in the Primary Market
- Public issue: When a company raises funds by selling (issuing) its shares (or debenture / bonds) to the public through issue of offer document (prospectus), it is called a public issue. Initial Public Offer (IPO): When a (unlisted) company makes a public issue for the first time and gets its shares listed on stock exchange, the public issue is called as initial public offer (IPO).Follow-on public offer (FPO): When a listed company makes another public issue to raise capital, it is called follow-on offer (FPO).
- Offer for sale: Institutional investors like venture funds, private equity funds etc., invest in unlisted company when it is very small or at an early stage. Subsequently, when the company becomes large, these investors sell their shares to the public, through issue of offer document and the company’s shares are listed in stock exchange. This is called as offer for sale. The proceeds of this issue go the existing investors and not to the company.
- Private Placement: The sale of securities to a relatively small number of select investors for raising capital. Investors involved in private placements are usually large banks, mutual funds, insurance companies and pension funds. Private placement is the opposite of a public issue, in which securities are made available for sale on the open market.
- Issue of Indian Depository Receipts (IDR): A foreign company which is listed in stock exchange abroad can raise money from Indian investors by selling (issuing) shares. These shares are held in trust by a foreign custodian bank against which a domestic custodian bank issues an instrument called Indian depository receipts (IDR).IDR can be traded in stock exchange like any other shares and the holder is entitled to rights of ownership including receiving dividend.
- Rights issue (RI): When a company raises funds from its existing shareholders by selling (issuing) them new shares / debentures, it is called as rights issue. The offer document for a rights issue is called as the Letter of Offer and the issue is kept open for 30-60 days. Existing shareholders are entitled to apply for new shares in proportion to the number of shares already held.
- Bonus Issue, the company issues new shares to its existing shareholders. As the new shares are issued out of the company’s reserves (accumulated profits), shareholders need not pay any money to the company for receiving the new shares.