Define floatation and explain the different methods employed in floatation.

Floatation is the process by which companies make shares/debentures available for subscription. It enables companies to raise capital from the public. Companies generally employ any of the following methods;

1. Direct Invitation by the company/Public/Prospectus issue:

By this method, the company floating the shares prepares and issues a prospectus inviting subscription. The prospectus must contain so far as applicable the matters and reports specified in part 1 and 2 of the 3rd schedule to the Act. An application form must be enclosed. The prospectus must set out the advantages of investing in the company and may identify the underwriter if any. The company is responsible for the administrative tasks of the issue and the risk if the issue is unsuccessful. To spread such risk, the company arranges for the issue to be underwritten whereby an underwriter undertakes to take up all or a specified number of shares as his own. These shares are often taken at a discount and are called Underwritten firm. The underwriter undertakes to take up a specified number of shares if not take up in return for commission. The difference between the underwriter and the commission paid by the Principal underwriter to the sub-underwriter and is the Overriding Commission

2. Offer for sale:

This is the method by which a company allots all the shares to an issuing house which in turn prepares and issues a prospectus inviting subscription. The issuing house offers the shares at a premium to recover its costs and make a profit upon application of the shares;

the issuing house renounces its allotment in favour of the applicant. This method has 2 advantages:

If relieves the company the administrative tasks of the issue.
The company receives the entire consideration on the shares since they are all taken up by the issuing house.

For purposes of spreading risk, the issuing house may have the shares underwritten

3. Placing:

By this method, the company arranges with an issuing house to purchase all the shares or take them up without a purchase and then place them with its clients privately. If the issuing house does not purchase the shares, it acts as an agent in return for brokerage and incurs no liability if the shares are not taken up. In a placing, there is no direct or indirect invitation to the public and the shares are generally offered in blocks to clients of the issuing house. This approach ensures that the shares on offer are taken up by the selected individuals or institutions.

Invitation to Treat:

Whichever method a company employs to issue shares or debentures, invitations may be made to prospective tenders to submit tenders for shares in large quantities. The company or issuing house fixed the minimum number of shares and price and reserves the right to accept any bid or accept bids in parts. The tender is generally awarded to the highest bidder. An offer by tender has 2 advantages:

(i) It makes available to the company or issuing house any excess above the issuing price.
(ii) It discourages stags who submit bids for speculative purposes.

A company may raise capital from existing members if authorized by its articles. This may be effected by a rights or bonus issue. In a rights issue shares are offered to existing members in proportion to their current holding. They are offered by way of renounceable allotment letters. A member is free to renounce his rights in favour of another. The shares are generally offered on favourable terms to encourage subscription. These shares prevent the dilution of rights of existing members. In the case of bonus shares, shares are offered to existing members at no direct consideration. The shares often referred to as capitalization issue are generally financed by reserves or the share premium account. A company may only issue bonus shares in the following circumstances:

(i) The issue must be authorized by the articles of the company
(ii) The issue must be issued in the proportion specified in the articles
(iii) The nominal share capital of the company must be sufficient
(iv) The issue must be recommended by the Board of Directors in board meeting
(v) The issue must be authorized by an ordinary resolution of members in the general meeting.
(vi) A return of allotment must be delivered to the registrar for registration within 60 days thereof.

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