What is Private Placement?
Private Placement refers to direct sales of securities by a company to institutional investors like Mutual funds, Pension funds Insurance companies, Banks etc. The issuer can either be a Public Limited Company or a Private Limited Company. In this method a prospectus is not issued and shares are offered only to a select group of investors.
Advantages of Private Placement
The following are the advantages of private placement:
1. Speed in raising finance: If a company goes in for a fresh issue through public issue there are lot of procedures to be followed which take a lot of time. On the other hand, it is possible to raise resources through private placement within 1 or 2 months.
2. Low cost: The company need not spend money in preparation and printing of prospectus, printing of application forms, transporting them to different places, advertisements of the issue in the media etc
3. Confidentiality: The company can maintain strict confidentiality. In the case of issue through prospectus many disclosures have to be made. But in the case of private placement disclosures made are less and they are made to a select few. Therefore confidentiality can be maintained.
4. Small amounts can be raised: Even small amounts can be raised through private placement.
5. Stable market: The private placement market is more stable when compared to the stock markets. Volatility is less and issues are marketed in a professional manner.
The widely used instrument in the private placement market is Non-convertible Debentures.