Public Issue and Private Placement

Every business needs capital to grow, innovate, or even survive turbulent times. But how does a company decide where to get this money? Choosing between a Public Issue and a Private Placement is one of the most consequential decisions a firm can make. This topic forms the backbone of both practical financial management and examination success in commerce.

Public Issue

a. IPOs and FPOs

Initial Public Offering (IPO) is when an unlisted company offers its shares to the public for the first time and gets listed on a stock exchange. It transforms a private company into a public one, allowing anyone to become a shareholder. Follow-on Public Offering (FPO) is when an already listed company issues additional shares to raise more capital. Both approaches open up access to a wide pool of investors and often serve as indicators of the company's growth ambitions and credibility.

b. Purpose of Public Issue

Firms opt for public issues to:

• Raise substantial, long-term capital for expansion, debt repayment, or diversification.
• Enhance their reputation and transparency, as listing requires rigorous disclosures and adherence to regulations.
• Provide liquidity to existing investors and create a public market for the company’s shares.

c. Process of Raising Equity Capital Through Public Issue

The process is structured and involves multiple stakeholders:

1. Appointment of Merchant Banker: The company appoints a SEBI-registered merchant banker (lead manager) to manage the issue and ensure compliance.
2. Preparation of Draft Red Herring Prospectus (DRHP): Detailed information about the company, its financials, risks, and use of proceeds is compiled.
3. Filing and Approval: The DRHP is filed with SEBI for review. Comments and clarifications are addressed before final approval.
4. Book Building Process: In modern IPOs, the price is discovered through book building. Investors bid within a price band, and the final price is set based on demand.
5. Marketing and Roadshows: The company and merchant bankers meet potential investors to generate interest and gauge demand.
6. Issue Opening: The offer is opened for subscription, usually for 3-5 days. Applications are received electronically.
7. Allotment and Listing: Shares are allotted, refunds processed, and the shares are listed on the stock exchange for trading.

The merchant banker plays a pivotal role throughout, acting as the intermediary between the company, regulators, and investors and ensuring due diligence at every stage.

d. Regulatory Compliance under SEBI ICDR Regulations

Public issues in India are governed by the SEBI (Issue of Capital and Disclosure Requirements) Regulations, commonly known as SEBI ICDR. These regulations lay down stringent requirements on:

• Eligibility norms for companies (profit track record, net tangible assets, etc.).
• Disclosure norms in the prospectus – including business overview, financials, litigation, risk factors, and use of funds.
• Allotment and refund timelines, to protect investor interests.
• Continuous disclosure obligations post-listing for transparency and accountability.

Non-compliance can halt the issue or result in penalties. This regulatory rigour upholds market integrity and investor trust.

Private Placement

a. Private Placement and Preferential Allotment

Private placement refers to the sale of securities (shares or debentures) to a select group of investors—often institutions, banks, or high-net-worth individuals—rather than the general public. This route is faster and often more confidential.

A subset is preferential allotment, where shares are issued to a predetermined set of investors, often promoters, strategic partners, or select institutional buyers, usually at a pre-agreed price. Both methods allow companies to raise funds without the extensive procedures and disclosures required for public issues.

b. Purpose and Strategic Use

• Private placements provide quick access to capital, ideal for time-sensitive projects or when market conditions are volatile.
• They enable companies to bring in strategic investors who can add value beyond just capital, such as technical know-how or distribution networks.
• Preferential allotment is frequently used to strengthen promoter control or to reward key stakeholders.

c. Regulatory Compliance for Private Placement and Preferential Allotment

While not as exhaustive as public issue regulations, private placements are still governed by SEBI and the Companies Act, 2013. Key requirements include:

• Circulation of a detailed private placement offer letter to a maximum of 200 identified persons in a financial year (excluding QIBs and employees under ESOPs).
• Mandatory filing of relevant forms and disclosures with the Registrar of Companies and SEBI.
• Adherence to pricing guidelines to prevent unfair dilution of existing shareholders’ value.
• Board and shareholder approval before the offer is made.

Preferential allotments by listed companies must comply with SEBI ICDR regulations, including lock-in periods for shares and pricing norms based on market prices.

Public Issue vs Private Placement

Example

Consider the case of a technology start-up planning to expand operations:

1. It evaluates both public issue and private placement. An IPO would give it access to a large pool of capital and boost its visibility, but the process is time-consuming and expensive.
2. Alternatively, it can approach three venture capital firms for a private placement. The deal is negotiated directly, completed in a few weeks, and the investors also offer strategic advice.
3. The company chooses private placement for its speed and strategic benefits, but plans an IPO in the future to fuel further growth and provide an exit for the early investors.

The choice between public issue and private placement is not just about raising money—it's about aligning the company's needs, timeline, and vision with the right pool of investors. Mastering the distinctions and procedures is essential for both business leaders and commerce scholars.

Whether through a public issue or private placement, raising capital shapes a company’s destiny.