Which of the following statements about private placement is correct?

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → It helps a company to raise capital more quickly than a public issue.

Option (1) It involves inviting subscription from the public through the issue of a prospectus. — Incorrect. Inviting the public to subscribe through a prospectus is offer through prospectus. Private placement does not invite the public.

Option (2) It helps a company to raise capital more quickly than a public issue. — Correct. Private placement allots securities to institutional investors and some selected individuals. Only a few chosen investors are involved, so it helps to raise capital more quickly than a public issue.

Option (3) It is a privilege given to existing shareholders to subscribe to a new issue. — Incorrect. A privilege given to existing shareholders to subscribe to a new issue is a rights issue.

Option (4) It is the issue of capital to the public through the on-line system of the exchange. — Incorrect. Issuing capital to the public through the on-line system of the stock exchange is an e-IPO.

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.”

“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.”