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What is Private Placement of Shares?
We know that a company can raise funds from the capital markets by issuing shares to a number of shareholders. When a company offers the opportunity of investment to a select group of investors, it is known as private placement.
Private placement is an alternative to an Initial Public Offering (IPO) for a company seeking to raise capital. In a private placement, the number of investment participants is limited to less than 50.
Private placement is a popular way to resource funding by the companies in India. Let's check why companies prefer private placement as a source of funding.
Less Stress of Compliance
There are very few legal compliance issues related to private placements as opposed to public issues of securities. This implies that companies resorting to private placement need to adhere to less legal norms while doing so. This is why private placement is considered an easy and friendly deal by Indian companies.
Usually, public issues of securities are costly in nature. There are legal as well as formal documentation and other miscellaneous costs associated with public offers. Selective placements do not have to incur such costs, and that is why it is preferred by a lot of companies.
Easy and Less Time-Consuming
As the number of investment participants in low in the case of the selective private placement, it is an easy and less-time consuming matter than a public offering. Moreover, a lesser number of participants makes it a less complex matter too.
As the companies do not need to consider and judge the preferences of a large group of people as in the case of public placement, the private placement makes the distribution of securities easier and more time-effective.
As the number of participants is low in the case of private placements, the company can offer the solution for all investors in a private placement than in the case of other issuance norms. The company can make a tailor-made deal with its investors in the case of a private placement which is not possible in the case of public offers as the number of participants in a public offering is too large.
Companies in India consider private placement as superior to public offers. However, there are some disadvantages of this type of funding too. For example, being selective, there is hardly any information available about the process in general. As the trading takes place privately, there is a doubt of transparency and the legal nature of the funding too. However, from the companies’ point of view, it is an easier and more effective approach to source funds from the selected investors and hence the popularity.
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