Explain the following as methods of new issues: (a) Public issue; and (b) Rights issue

Question

Accepted Answer

**(a) Public Issue / Going Public:**

Public issue is the most popular method of raising capital by entrepreneurs. This involves raising funds directly from the public through the issue of a prospectus. An enterprise organizing itself as a public limited company can raise the required funds by preparing a prospectus. When an entrepreneur offers shares to the public for subscription, he/she is required to comply with all the restrictions and formalities pertaining to the initial issues, prospectus drafting, and launch.

The primary advantage of public issue is access to capital. The capital does not have to be repaid and does not involve an interest charge. The only reward the IPO investors seek is an appreciation of their investment and possibly dividends. Other advantages include use of public stock for mergers and acquisitions, higher valuations, benchmark trading price, capital formation, stock options as employee incentives, liquidity for management and investors, and added prestige.

**(b) Rights Issue:**

Rights issue is a method of raising additional finance from existing shareholders by offering securities to them on a pro-rata basis, i.e., giving them a right to a certain number of shares in proportion to the shares they are holding. Normally, through a circular, rights issues are proposed to the existing shareholders, and in case they are not willing to subscribe, they can renounce the same in favour of another person. This method of issuing securities is considered to be inexpensive as it does not require any brokers, agents, underwriters, prospectus, or enlistment.