Pratap Furnitures Ltd. is the market leader in moulded furniture. Now it is planning to enter into a new product line, furniture made of wood and bamboo. To start production it needs Rs.2 crore. Pratap Furniture Ltd. is planning to raise funds by issue of prospectus. But its Board of Directors decided to honour the existing shareholders by offering them the shares on pro-rata basis, before going for issue through prospectus. (i) Identify and explain the type of capital market from which Pratap Furnitures Ltd. is going to raise funds. (ii) Explain the two methods of raising funds discussed in the above case. (iii) What reward do the investors get when shares are issued through prospectus?

Question

Accepted Answer

(i) **Primary Market:** Pratap Furnitures Ltd. is going to raise funds from the **Primary Market**, also known as the New Issues Market. The primary market facilitates the transfer of resources from savers to entrepreneurs seeking funds for setting up new enterprises, expanding, or diversifying. Since Pratap Furnitures needs Rs. 2 crore to enter a new product line (wood and bamboo furniture), it will raise capital by issuing new securities.

(ii) Two methods of raising funds discussed in the case:

- **Rights Issue:** The Board of Directors decided to honour the existing shareholders by offering them shares on pro-rata basis before going for issue through prospectus. 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.

- **Public Issue (Issue through Prospectus):** Pratap Furnitures Ltd. planned to raise funds by issue of prospectus, which involves raising funds directly from the public through the issue of a prospectus. This is the most popular method of raising capital by entrepreneurs.

(iii) When shares are issued through prospectus, the reward that investors get is the **appreciation of their investment and possibly dividends**. The capital does not have to be repaid and does not involve an interest charge. Investors seek capital gains and regular income through dividends.