Continuing with the discussion on raising capital by business entities, unlike what I mentioned in my earlier post, capital can also be raised directly from the savers. Small businesses borrow money from the friends/relatives of the promoter directly; whereas large corporate houses raise money from public at large. (There are various reasons why businesses do not fully depend on banks and financial institutions for capital, which is not explained here). A business enterprise can raise capital in the form of debt or equity (ownership). When an enterprise raises capital directly from the public, it is said to be raising the money from the 'Primary Market'. Unlike many other forms of market, primary market is a notional one, with no specific location or office. However, this market is regulated by the government through appropriate regulatory bodies.
Since there is no specific location; and savers, who would be interested in supplying capital to the firm are geographically scattered throughout the country, the firm has to put in place a complete system to reach the prospective suppliers of capital. It resorts to the following processes and depends on the respective intermediaries in the process.
(a) Obtaining regulatory approvals (wherever required)
(b) Releasing advertisement inviting public to subscribe to the bonds/shares
(c) Preparing and printing prospectus containing various details of the issue
(d) Printing application forms
(e) Approaching brokers/sub-brokers to promote the issue
(f) Appointing registrars to manage the issue
(g) Appointing bankers to collect the payment etc.
Thus, as against loan from a bank or financial institution, the process of raising capital directly from the public involves lot of money (spent on the above activities) and it is time consuming. Then why do businesses raise capital directly from public?
Since there is no specific location; and savers, who would be interested in supplying capital to the firm are geographically scattered throughout the country, the firm has to put in place a complete system to reach the prospective suppliers of capital. It resorts to the following processes and depends on the respective intermediaries in the process.
(a) Obtaining regulatory approvals (wherever required)
(b) Releasing advertisement inviting public to subscribe to the bonds/shares
(c) Preparing and printing prospectus containing various details of the issue
(d) Printing application forms
(e) Approaching brokers/sub-brokers to promote the issue
(f) Appointing registrars to manage the issue
(g) Appointing bankers to collect the payment etc.
Thus, as against loan from a bank or financial institution, the process of raising capital directly from the public involves lot of money (spent on the above activities) and it is time consuming. Then why do businesses raise capital directly from public?
Loan/debt is to be repaid and contain a fixed cost and even a QIP or FII, they bargain for fixed IRR or atleast a range. So raising money from primary market though involves delivery of result quarter after quarter. Its better than to pay a fixed return over a period of time.
ReplyDeleteeg: SKS micro finance, they opt for public issue instead of FII. Its not they opted out of it , I guess it was hard to convince about rate of return of Fund Managers.
~Views are personal openin.
A public offer creates a market value on a company’s stock. Also, a company’s valuation and debt-to-equity ratio will perk up after going public, making it possible for the company to receive much better terms from lenders.
ReplyDeleteIf a private company goes for venture capitalists to raise capital, instead of going public, the VC’s may insist on a decision-making position, such as a seat on the board of directors. By raising from public such unpleasant can be avoided and the prestige with becoming a public company has a definite appeal.