Vira Ltd. needs funds quickly to expand. Instead of inviting the public, it allots new shares to two financial institutions and a few selected individuals. A year later, one of these institutions sells part of its shares to a mutual fund through the stock exchange. Identify the method of floatation used by Vira Ltd. and the market in which the later sale took place.
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Private placement; secondary market
Option (1) Offer for sale; secondary market — Incorrect. The later sale is rightly in the secondary market. But Vira Ltd. did not sell en bloc to brokers. It allotted the shares itself to chosen investors.
Option (2) Private placement; secondary market — Correct. Allotting new shares to financial institutions and a few selected individuals is private placement. The later sale of these existing shares between investors, through the stock exchange, takes place in the secondary market.
Option (3) Private placement; primary market — Incorrect. The method is right. But the later sale is of existing shares between two investors, so it takes place in the secondary market.
Option (4) Offer for sale; primary market — Incorrect. Both parts are wrong. No brokers bought the shares en bloc, and the resale of existing shares is not a new issue.
NCERT (Pre-rationalised Edition): “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. …” “SECONDARY MARKET The secondary market is also known as the stock market or stock exchange. It is a market for the purchase and sale of existing securities. It helps existing investors to disinvest and fresh investors to enter the market. It also provides liquidity and marketability to existing securities. It also contributes to economic growth by channelising funds towards the most productive investments through the process of disinvestment and reinvestment. Securities are traded, cleared and settled within the regulatory framework prescribed by SEBI. Advances in information technology have made trading through stock exchanges accessible from anywhere in the country through trading terminals. Along with the growth of the primary market in the country, the secondary market has also grown significantly during the last ten years.” |