Which of the following pairs of method of floatation and its description is correctly matched?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Offer through prospectus – A direct appeal to investors through advertisements in newspapers and magazines
Option (1) Offer for sale – A privilege given to existing shareholders to subscribe to a new issue of shares — Incorrect. A privilege given to existing shareholders describes a rights issue. In an offer for sale, the company sells en bloc to brokers who resell the shares.
Option (2) Rights issue – Allotment of securities to institutional investors and some selected individuals — Incorrect. Allotment to institutional investors and selected individuals is private placement. A rights issue offers new shares to existing shareholders.
Option (3) Private placement – Sale of securities en bloc at an agreed price to brokers, who resell them — Incorrect. Selling en bloc to brokers who resell is an offer for sale. Private placement allots securities to institutions and selected individuals.
Option (4) Offer through prospectus – A direct appeal to investors through advertisements in newspapers and magazines — Correct. A prospectus makes a direct appeal to investors through advertisements in newspapers and magazines. It invites the public to subscribe.
NCERT (Pre-rationalised Edition): “1. Offer through Prospectus: Offer through prospectus is the most popular method of raising funds by public companies in the primary market. This involves inviting subscription from the public through issue of prospectus. A prospectus makes a direct appeal to investors to raise capital, through an advertisement in newspapers and magazines. The issues may be underwritten and also are required to be listed on at least one stock exchange. The contents of the prospectus have to be in accordance with the provisions of the Companies Act and SEBI disclosure and investor protection guidelines.” “2. Offer for Sale: Under this method securities are not issued directly to the public but are offered for sale through intermediaries like issuing houses or stock brokers. In this case, a company sells securities enbloc at an agreed price to brokers who, in turn, resell them to the investing public.” “3. Private Placement: Private placement is the allotment of securities by a company to institutional investors and some selected individuals. It helps to raise capital more quickly than a public issue. …” “4. Rights Issue: This is a privilege given to existing shareholders to subscribe to a new issue of shares according to the terms and conditions of the company. The shareholders are offered the ‘right’ to buy new shares in proportion to the number of shares they already possess.” |