A company may raise capital from the public in three ways. This process is often referred to as “floatation” or “flotation” and securities are availed to the public for subscription. These approaches are:
• Direct invitation to the public (public or prospectus issue)
• Offer for sale
• Placing
Direct invitation
By this method, the company prepares and issues a prospectus inviting the public to subscribe for its securities. The prospectus must comply with the requirements of the Companies Act and application forms must be enclosed. The company is responsible for the administrative tasks of the issue and bears the risk if the issue is unsuccessful. To spread such risk the company may arrange for the issue to be underwritten by an underwriter who undertakes to take up all or a specified number of securities if not taken up by the public in return for a commission. The prospectus ordinarily identifies the underwriter, if any. Members of the public and corporations make offers for the securities by completing and submitting to the Company an application form.
Offer for sale
By this method the company desirous of raising capital allots all the securities to an issuing house which in turn prepares and issues a prospectus inviting the public to subscribe for the securities. The securities are offered at a premium and the issuing house may arrange for the issue to be underwritten so as to spread risk. Once an application for securities is made the issuing house renounces its allotment in favour of the applicant. This approach has two advantages:
• It relieves the company the administrative tasks of the issue.
• The company receives the entire consideration on the issue.
Placing
By this method the company arranges with an issuing house to purchase all the securities on offer or take them up and then “place” them with its clients privately.
There is no direct or indirect invitation to the public. This approach ensures that the securities are taken up by selected persons or institutions.
If the issuing house does not purchase the securities it acts as an agent for the company and is paid brokerage for the services rendered.