Question

Answer each of these questions in about two hundred and fifty words:

“An entrepreneur can raise the required capital in the primary market.” Explain the various methods of raising the funds in the primary market by an entrepreneur.

Answer 1

 Yes, an entrepreneur can raise the required capital in the primary market. The various methods of raising the funds in the primary market by an entrepreneur are as follows :

1.  Public Issue
2. Rights Issue
3.  Private Placement
4.  Offer to the employees

1. Public Issue/Going Public: Public issue is the most popular method of raising capital these days by the entrepreneurs. This involves raising of funds directly from the public through the issue of prospectus. An entrepreneur organizing itself as public limited company can raise the required funds commonly by adopting prospectus.
2. Right Issues: It is an offer of new securities by a listed company to its existing shareholders only. The right issues are done always on the pro-rata basis (giving them a right to a certain number of shares in proportion to the shares they are holding.)
   • The companies send the letter of offer (circular) to all those existing shareholders whose names are recorded in the books on a particular date to issue rights.
   • The time given to accept the right offer should not be less than 15 days.
   • The circular/notice issued to the shareholder must state the right of the shareholder to renounce the offer in favour of others.
   • After the expiry of the time mentioned in the notice, the Board of Directors has the right to dispose the unsubscribed shares in any manner as per the benefit of the company.
   The existing shareholders whose names are there in the list has four options:
   • They can exercise the rights.
   • They can renounce the rights and sell them the same in the open market in favour of another person.
   • They can renounce part of the rights and exercise the other part.
   • Doing nothing.
   This method of issuing securities is considered to be inexpensive as it does not require any brokers, agents, underwriters, prospectus or enlistment, etc.
3.  Private Placement: It refers to the direct sale of newly issued securities by the company to a small number of institutional investors through merchant bankers. They are generally selected clients.
   • Unit Trust of India
   • Life Insurance Corporation of India
   • General Insurance Corporation of India
   • Army Group Insurance
   • State Level Financial Corporations
   Advantages:
   • Less time taken to issue these shares.
   • Comparatively less amount of cost of capital is req*fired.
   • These issues are tailor-made to suit the requirement of both the parties.
   • Less formalities are required.
4.  Offer to employees: Stock options to the employees refers to the offer given by the company to the employees to become shareholders. This method facilitates the employees to become shareholder and can earn a part of the share of profits.