Read the following passage and answer the question.

AAMA Solar Limited is searching options to raise ₹2,000 crores from the primary market for diversification and modernisation of existing projects. It hired the services of a renowned financial consultancy firm, Laxmi Pvt. Ltd. for suggesting options for the same. Laxmi Pvt. Ltd. suggested a list of options to the board of directors. It was decided that for the immediate requirement of ₹150 crores, the company will give a privilege to existing shareholders to subscribe to a new issue of shares according to the terms and conditions of the company ₹500 crores would be raised by allotment of securities to a consortium of financial institutions, instead of investing subscription from the public by making a direct appeal to investors to raise capital. It was further decided to raise capital to the tune of ₹650 crores through an issuing house. All these options were accepted by the Board of Directors. The Board further decided to raise ₹700 crores through the online system of the stock exchange by entering into an agreement with the exchange.

₹500 crores would be raised by allotment of securities to a consortium of financial institutions, instead of investing subscription from the public by making a direct appeal to investors to raise capital.

Identify the method of flotation of new issues in the above lines.

Private placement

The correct answer is option 3- Private placement.

Private placement is highlighted in the lines- ₹500 crores would be raised by allotment of securities to a consortium of financial institutions, instead of investing subscription from the public by making a direct appeal to investors to raise capital.
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. Access to the primary market can be expensive on account of various mandatory and non-mandatory expenses. Some companies, therefore, cannot afford a public issue and choose to use private placement.

OTHER OPTIONS

• 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.

• 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.

• 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 the 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.