In the contemporary business world, companies have adopted a modern approach to raise capital by offering their securities in exchange for cash. These activities take place within the primary market, specifically focused on the issuance of new securities. Within this market, companies secure funding by selling shares of their company to potential investors. The process of selling these shares to investors is termed as underwriting, and the sale event itself is referred to as an initial public offering or listing. Companies primarily have two options to access funds: a Public Issue or Private Placement.
There are various methods of issuing shares, and as an investor, it’s essential to possess sufficient knowledge about their types. In this blog, we aim to discuss the difference between Public Issue and Private Placement, providing a comprehensive understanding of both choices for prospective investors.
Understanding Public Issues
Before going into the difference between Public Issue and Private Placement, let us first understand public issues. Public issues, also known as public offerings, represent a critical method for companies to raise capital in the primary market. This process involves the issuance of convertible securities or shares by company promoters with the aim of attracting new investors. In this structured approach, companies release a prospectus to invite participation from the general public, offering shares in exchange for investment funds. Prospective investors who wish to acquire these shares submit applications to the issuing company, which subsequently allocates shares to them. The entity issuing its shares or securities in this manner is referred to as the issuer.
Public issues constitute a widely embraced method of gathering capital from a diverse and extensive group of individuals. Unlike private funding by a company’s promoters, public issues occur in the open market. By making shares available to the public, companies gain access to substantial capital resources for the initiation, expansion, or sustenance of their businesses. Furthermore, this approach allows the public to become partial owners of the company without any controlling interest.
Regulatory Framework for Public Issues
In learning the difference between Public Issue and Private Placement, one must be clear about the specific statutory provisions and regulatory frameworks for public issues. These include:
1. Companies Act, 2013: Public offerings are governed by Chapter 3, Part 1 of the Companies Act, 2013. This legislation outlines key provisions and guidelines for conducting public issues.
2. Securities Contract Regulation Act, 1956: The Securities Contract Regulation Act of 1956 plays a vital role in regulating various aspects of securities trading and issuance.
3. RBI Regulations: The RBI imposes regulations pertinent to public issues, contributing to the orderly functioning of the financial market.
4. SEBI Rules and Regulation 2009: The Securities and Exchange Board of India is a central regulatory authority responsible for overseeing and regulating the securities market in India. The SEBI Rules and Regulations of 2009 provide comprehensive guidelines for conducting public issues.
5. SEBI Listing Regulation 2015: SEBI Listing Regulations, established in 2015, offer additional regulatory guidance related to the listing and trading of securities on stock exchanges.
Compliance with these statutory provisions and regulatory frameworks is crucial for companies engaging in public issues to ensure transparency as well as fairness, and accountability in the capital market and is a must to know before going into difference between Public Issue and Private Placement.
Different Types of Public Offers
The Securities and Exchange Board of India plays a pivotal role in overseeing public issues of shares and regularly updates its guidelines to protect the interests of investors. In getting deeper into the difference between Public Issue and Private Placement, the various categories of public offers must be understood first, which are:
1. Initial Public Offer (IPO)
An Initial Public Offering, commonly also known as an IPO, is the process through which shares or securities of an unlisted company are introduced and listed on a recognized stock exchange. This process acts as an entry point for unlisted companies, including emerging start-ups, to make their shares available to the public and generate funds from the broader market. The core goal of an IPO is to broaden and diversify business operations.
Additionally, established organizations may choose to go public through IPOs to enable the sale of a portion or the entirety of their ownership stakes to the public. For companies newly entering the corporate world, IPOs represent a significant source of fundraising. However, it’s important to note that IPOs carry higher risks compared to Further Public Offerings, as these companies are making offerings to the public for the first time.
2. Further Public Offer (FPO)
Also known as a Follow-on Public Offer, a Further Public Offer involves the issuance of shares by a company that has been already listed on a stock exchange. Such companies have successfully navigated through all the procedures and requirements of an IPO. Consequently, investors are well-acquainted with the company’s performance, which makes FPOs comparatively less risky when contrasted with Initial Public Offerings. Companies pursuing FPOs typically seek to raise additional capital or meet specific corporate objectives through this method.
Advantages of Public Issue
Before making a comparison of difference between Public Issue and Private Placements, it is essential to understand the advantages and disadvantages associated with a Public Issue:
1. Access to Abundant Capital: Public Issues allow a company to raise a substantial amount of capital, enabling them to fulfill their business needs and growth objectives.
2. No Fixed Interest Payments: Unlike debentures, Public Issues do not involve fixed interest payments, which can provide financial flexibility to the issuer.
3. Enhanced Company Value: Publicly traded shares on the stock exchange signify transparency and a commitment to investors and the public, which can enhance the company’s reputation and goodwill.
4. Easy Transferability: Publicly issued shares are easily transferable, facilitating the transfer of ownership among investors.
5. Liquidity: Shares are inherently more liquid than other types of securities, allowing investors to buy and sell them with relative ease.
Disadvantages of Public Issue
Again, before going into the difference between Public Issue and Private Placement, the disadvantages of public issue must be known, which are:
1. Lengthy Process: The process of conducting a Public Issue of shares is often time-consuming and can be protracted. Seeking professional assistance is advisable to streamline the procedure.
2. Costly Affair: Shares can be costlier than low-interest-bearing debentures, primarily due to dividend payments to shareholders.
3. Complex Requirements: Companies must fulfill several prerequisites and comply with regulations before pursuing a Public Issue of shares. Non-compliance may result in penalties.
4. Reduced Privacy: Listing a company’s shares on the stock exchange reduces the level of privacy, as financial and operational information becomes publicly available.
Understanding these advantages and disadvantages is crucial for learning the difference between Public Issue and Private Placement and for companies considering a Public Issue as a means of raising capital, as it helps them make informed decisions regarding their financing strategies.
Understanding Private Placement
Private Placement is a process of raising funding in which a company issues its shares directly to a select group of investors. This process is often referred to as a non-public offering. In marking the difference between Public Issue and Private Placement, it must be noted that in Private Placements, the investors typically belong to categories such as insurance companies, large banks, pension funds, and mutual funds. Unlike public offerings, Private Placements do not have stringent regulatory guidelines, and companies are not required to be registered with the regulatory body.
Key Points about Private Placement
Before discussing the difference between Public Issue and Private Placement, some major points about private placement are as mentioned below:
1. Limited Investor Group: Private Placements target a specific, restricted group of investors. These investors are often institutional entities with a significant financial capacity.
2. Less Regulatory Oversight: Unlike public offerings, Private Placements are subject to fewer regulatory requirements and reporting obligations. This allows companies greater flexibility in structuring the offering.
3. Cost-Effective: Private Placements are generally more cost-effective for companies compared to Initial Public Offerings (IPOs). The reduced regulatory burden and associated costs contribute to this advantage.
4. Limited Risk Appetite: Private Placements may not be suitable for raising large amounts of capital since the pool of investors is relatively small, and they typically have a limited risk appetite.
5. Lack of Secondary Market Trading: Securities issued through Private Placements are not traded in the secondary market like IPO securities.
Guidelines for Conducting a Private Placement
When considering issuing shares and securities through Private Placement, it’s essential to adhere to the following guidelines for better understanding what is the difference between Public Issue and Private Placement:
1. Limit the Number of Investors: A company can offer its securities for subscription to a maximum of 50 persons in a financial year, or as per any higher number prescribed by regulatory authorities.
2. Exclusions: Qualified institutional buyers and employees of the company participating in an employees’ stock option scheme should not be counted as part of the 50-person limit. These categories are typically exempt from the investor count.
3. Caution with Investor Count: If a listed or unlisted company extends an offer to allot securities or invites subscriptions from more individuals than the prescribed limit (50 or as defined by regulatory authorities), it will be considered a public offering.
4. Listing Considerations: Whether a company intends to list its securities on a recognized stock exchange in India or abroad should not affect the decision to conduct a Private Placement. The primary focus of Private Placement is to offer securities to a limited number of investors, regardless of the listing status.
5. Payment Status: The decision to issue securities through Private Placement should not depend on whether the company has already received payment from investors. Private Placement can occur before or after payments are received.
Advantages of Private Placement
It is essential to learn the benefits of pvt. Placement before going deeper into the difference between Public Issue and Private Placement. Private Placement offers several advantages for raising finance in a business context:
1. Selective Investor Choice: Private Placement allows issuers to choose their investors carefully. This enables the selection of investors who align with the company’s goals and may provide not only funding but also valuable business assistance.
2. Maintaining Private Status: Opting for Private Placement instead of a Public Issue helps a company maintain its private status, preserving confidentiality and control.
3. Flexibility: Private Placements offer flexibility in the type and amount of funding. Companies can combine various financial instruments such as bonds and equity capital to tailor their financing strategy.
4. Patient Investors: Private Placement often attracts patient investors who are willing to hold their investments for an extended period. This patient capital can be beneficial for long-term business growth.
5. Faster Turnaround: Private Placements typically result in a faster turnaround when it comes to raising funds. This speed is particularly advantageous for riskier business ventures, making it one of the more secure methods of capital raising.
Disadvantages of Private Placement
However, there are certain drawbacks associated with using Private Placement, which must be known to understand the difference between Public Issue and Private Placement. These are:
1. Limited Market Access: Private Placements involve a smaller group of investors, limiting access to a broader market for bond issuances. This can have a long-term impact on the valuation and liquidity of the business.
2. Reduced Investor Pool: Private Placement reduces both the market size and the number of potential investors, potentially limiting the diversity of the investor base.
3. Discounted Shares: To compensate investors for taking on greater risk and committing to longer-term returns, companies often have to offer shares or bonds at a substantial discount, potentially diluting the value for existing shareholders.
4. Mandatory Credit Rating: Companies looking to issue shares or securities through Private Placements are usually required to provide credit ratings to investors. This process can be time-consuming and add to the overall cost of the issuance.
Difference between Public Issue and Private Placement
The detailed comparison table of difference between public issue and private placement has been mentioned below:
| Comparison | Public Issue | Private Placement |
| 1 | Public Issue is a method of selling securities to the public where there are a large number of investors | In Private Placement, companies sell securities directly to a few numbers of investors or institutions |
| 2 | Usually large scale companies use Public Issue to raise funds | Generally, small scale companies raise funds through Private Placement |
| 3 | For Public Offering, floatation cost is included since there is a requirement of an underwriter | There is no floatation cost included in Private Placement as there is no underwriter |
| 4 | In the process of Public Issue, the investment bankers act as a mediator between the issuers and investors of long-term funds in the capital market | In the case of Private Placement, there is no involvement of mediators since all the dealings are done directly between the issuers and investors |
Final Thoughts
The difference between Public Issue and Private Placement is a critical factor for companies seeking to raise capital. Public Issues offer access to a broad investor base but entail higher regulatory scrutiny, costs, and floatation expenses. They are typically favored by large-scale companies. In contrast, Private Placement offers flexibility, privacy, and a faster turnaround, making it an attractive option for smaller companies. However, it limits the investor pool, often involves discounted securities, and lacks the extensive market exposure of Public Issues.
Ultimately, the decision based on the difference between Public Issue and Private Placement is based on a company’s financial needs, growth objectives, and risk appetite, with careful consideration of the advantages and disadvantages inherent to each method of capital raising.
