Question

‘Ganpati Steel Ltd.’ is a large and creditworthy company manufacturing steel for the Indian market. It now wants to cater to the Asian market and decides to invest in new hi-tech machines. Since the investment is large, it requires long-term finance. The company decided to raise funds through the capital market. 40% of the funds will be raised directly from the public through the issue of prospectus. 40% of the shares will be directly sold to a limited number of sophisticated investors. 20% of the shares will be offered to the employees. Identify the methods of flotation of new issues used by the company. Also state one benefit of each method. The issue was very well accepted by the investors. Mr. Raman, an investor could not get shares allotted when the offer was made to the public. He wishes to invest in the company. State the option available to him now and how will it benefit Raman?

Answer 1

The company ‘Ganpati Steel Ltd.’ has used three methods of flotation of new issues to raise funds for their expansion plan.

1. Prospectus: The company issued a prospectus for public subscription of 40% of the shares. This method allowed the company to reach out to a large number of retail investors and raise funds from them. The benefit of this method is that it can attract a large pool of investors and provide the company with the required funds.

2. Private Placement: 40% of the shares were sold directly to a limited number of sophisticated investors. This method allows the company to sell shares to a smaller number of investors who are already familiar with the company and its business. The benefit of this method is that it saves time and money for the company as it does not have to go through the entire process of issuing shares to the public.

3. Employee Stock Option Plan (ESOP): 20% of the shares were offered to the employees of the company. This method allows the employees to become shareholders of the company and benefit from its growth. The benefit of this method is that it helps to retain the employees and motivate them to work towards the growth of the company.

Mr. Raman can now purchase the shares of the company from the stock market, as the issue has already been made public. This option is known as the secondary market, where shares of listed companies are bought and sold by investors. The benefit of this option is that it allows Mr. Raman to invest in the company without waiting for the company to issue new shares. Additionally, he can also benefit from the increase in the share price of the company, if the business performs well in the future.