What is Private Placement of Shares : Private placement of shares is – where a company places the shares with specific investors rather than invite applications for the new issue of shares. That means, in stead of issuing new shares through an issue to the public or existing shareholders, a company may decide to place its shares with specific investors like banks, life insurance companies, other financial institutions, mutual funds, superannuation funds etc.; which will be termed as private placements of shares. But there are certain Advantages And Disadvantages Of Private Placement Of Shares which are shortly discussed in below section of this topic.
The Advantages Of Private Placement Of Shares are:
* Speed — A private placement of shares can be effected in a short period of time.
* Price — As because this type of placement is made to other than existing shareholders and to a market that is potentially more informed and better funded, the issue price of the new shares may be closer to the market price at the date of issue or issue price may be higher than normal.
* Direction — These shares may be placed with investors who approve of the directions of the company or who will not interfere in the formation of company policies.
* Prospectus — In some cases, private placement of shares can occur without the need for a detailed prospectus to be prepared. So, it is easy to issue.
Disadvantages Of Private Placement Of Shares are:
* Dilution of current shareholders’ interests: The current shareholders will have their interest diluted in the company because of the private placement. In some countries, the securities regulations place specific limits on the amounts of placements of shares without the approval of existing shareholders.
* Shares are placed at a discount: If the company privately places the shares at a large discount, the interest of the existing shareholders will get affected . In some countries, securities laws are generally enacted to ensure that management cannot abuse the placement process and that current shareholders are protected.
If a company is private and issuing its shares through a private placement then the placement has no effect on share prices because there are no preexisting shares in the market.