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Chapter: Business Science - Merchant Banking and Financial Services - Issue Management Introduction

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Private Placement Method and its Advantages and Disadvantages

A method of marketing of securities whereby the issuer makes the offer of sale to individuals and institutions privately without the issue of a prospectus is known as 'Private Placement Method’.


PRIVATE PLACEMENT METHOD

 

A method of marketing of securities whereby the issuer makes the offer of sale to individuals and institutions privately without the issue of a prospectus is known as 'Private Placement Method’. This is the most popular method gaining momentum in recent times among the corporate enterprises. Under this method, securities are offered directly to large buyers with the help of shares brokers. This method works whereby securities are first sold to intermediaries such as issues houses, etc. They are in turn placed at higher prices to individuals and institutions. Institutional investors play a significant role in the realm of private placing. The expenses relating to placement are borne by such investors.

 

Advantages

 

1.  Less expensive as various types of costs associated with the issue are borne by the issue houses and other intermediaries.

 

2.   Less troublesome for the issuer as there is not much of stock exchange requirements connecting contents of prospectus and its publicity etc. to be complied with.

 

3. Placement of securities suits the requirements of small companies.

 

4.  The method is also resorted to when the stock market is dull and the public response to the issue is doubtful.

 

Disadvantages

 

1. Concentration of securities in a few hands. 2. Creating artificial scarcity for the securities thus jacking up the prices temporarily and misleading general public. 3. Depriving the common investors of an opportunity to subscribe to the issue, thus affecting their confidence levels.


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