Private Placement & Bought out Deals | Meaning | Features | Merits & Demerits

Meaning of Private Placement of Securities

Private placement method is a method of marketing of securities whereby the issuer makes the offer of sale to individuals and institutions privately without the issue of the prospectus. Recently, private placement has gained popularity among corporate enterprises.

Private Placement & Bought-out Deals
Private Placement & Bought-out Deals

Features of Private Placement of Securities

Under private placement method securities are offered directly to large buyers with the help of share brokers. This method works in a manner similar to the offer for sale method whereby securities are first sold to intermediaries such as issue houses, etc. They are in turn, placed at higher prices to individuals and institutions.

Institutional investors play a predominant role in private placing. The expenses relating to placement are borne by such investors.

Advantages of Private Placement of Securities

1. Private placement of securities is less expensive. Various costs associated with the issue are borne by the issue houses and other intermediaries.

2. Private placement of securities is not a cumbersome one. Stock exchange requirements concerning contents of prospectus and its publicity etc., are not so much.

3. Small companies find private placement of securities convenient.

4. Private placement of securities is highly beneficial where the public response to the issue is doubtful.

Disadvantages of Private placement

Private placement securities suffers from the following weaknesses.

1. securities are concentrated in a few hands

2. artificial scarcity is created for securities

3. common investors are deprived of their opportunities io subscribe to the issue.

Meaning of Brought-out deals

Under bought out deals, the issuer makes an outright sale of a chunk of equity shares to a single sponsor or the lead sponsor.

Features of Brought-out deals

1. The parties to bought out sale are

  1. promoters of the company
  2. sponsors and
  3. co-sponsors.

2. There is an outright sale of a chunk of equity shares to a single sponsor or the lead sponsor.

3. Sponsors form a syndicate with other merchant bankers for meeting the resource requirements and for distributing the risk.

4. The sale of securities is influenced by factors such as project evaluation, promoter’s image and reputation, current market sentiments, prospects of offloading these shares at a future date, etc.

5. Bought out deals are in the nature of fund based activity where the funds of the merchant bankers get locked in for at least the prescribed minimum period.

6. Investor can realize price when shares get listed and higher prices prevail. Listing is done when the performance of the company improves and the project generates larger cash inflows.

Benefits or Advantages of Bought-out deals

Following are the benefits of bought out deals.

1. Bought out deals ensure sedype sale of securities at low cost

2. Promoters have freedom to set a realistic price and convince the sponsor about the same.

3. Bought out deals facilitate better investors protection.

4. Bought out deals help enhance the quality of capital flotation and primary market offerings.

Limitations or disadvantages of bought-out deals

Bought out deals suffer from the following limitations.

1. Promoters of closely held companies apprehend that the sponsors may usurp control of the company as they own large chunk of the shares of the company.

2. Where market conditions are unfavorable, off-loading the shares may result in losses to sponsors.

3. Wrong appraisal of the project and over estimation of the potential price of the share may cause loss to sponsors.

4. There is great scope for manipulation at the hands of the sponsor through insider trading and rigging.

5. There are no adequate guidelines to regulate offerings by sponsors.

6. Sponsors earn windfall profits at the cost of small investors.