Understanding Public Issue and Rights Issue Distinctions

When a company needs to raise funds by issuing shares, it can do so through different methods. Two common methods are a public issue and a rights issue. It's important to understand the key differences between these types of issues to know who is offered shares, how the price is determined, and how the process works. The question asks us to identify which of the given statements describing distinctions between public issue and rights issue is/are not correct.

Analyzing Statements on Public vs. Rights Issue

• Statement (A): In public issue, applications for shares are invited from the general public and in rights issue, the shares are offered to existing shareholders.

  This statement presents a correct distinction. A public issue (specifically, an Initial Public Offering or IPO, or a Further Public Offering or FPO) targets potential investors from the general public who are not yet shareholders. A rights issue, on the other hand, is exclusively offered to individuals or entities who are already registered shareholders of the company on a specific record date. They are given the 'right' to subscribe to new shares in proportion to their existing holdings.

• Statement (B): In public issue there is no question of any over-subscription and in rights issue the shares may be under subscribed or over subscribed leading to prorata allotment.

  This statement presents an incorrect distinction. The first part, "In public issue there is no question of any over-subscription," is false. Public issues, especially popular ones, are frequently over-subscribed. When a public issue is over-subscribed, the demand for shares exceeds the number of shares offered. In such cases, shares are typically allotted on a pro-rata basis or through a lottery system among the applicants. The second part mentions rights issues can be under or over-subscribed and lead to pro-rata allotment. While rights issues can be under or oversubscribed, the standard method for handling significant over-subscription in a rights issue is not typically a general pro-rata allotment to all applicants in the same way as a public issue. Existing shareholders apply for their rights entitlement, and often, there's a facility to apply for additional shares if some shareholders do not take up their rights. Pro-rata allotment might apply to these additional applications, but the initial claim of "no question of any over-subscription" in public issues makes the entire distinction presented in this statement incorrect.

• Statement (C): The price of public issue is generally less than the market price and in rights issue, the price is deliberately made less than the market price.

  This statement presents a generally correct distinction, though the phrasing about the public issue price is not entirely accurate for all types of public issues (like Book Building). For a rights issue, the offer price is indeed deliberately set at a discount compared to the prevailing market price. This discount is an incentive for existing shareholders to subscribe to the new shares. For a public issue, the offer price is determined based on the company's valuation and market conditions, often close to the market price for FPOs or based on demand in Book Building for IPOs. It is not a general rule that the public issue price is "generally less than the market price"; it is typically determined to reflect the market value or potential market value. However, the core distinction regarding pricing strategy – discounted for rights issue vs. market-based for public issue – is correct.

• Statement (D): In a public issue, the communication of the issue is through prospectus or advertisements and in a rights issue the communication is between the company and the existing members of the company.

  This statement presents a correct distinction. A public issue requires a detailed document called a prospectus, which is made public through advertisements and regulatory filings to inform potential investors from the general public. A rights issue involves direct communication from the company to its registered shareholders, typically through a Letter of Offer sent individually to each eligible shareholder.

Conclusion on Incorrect Distinction

The distinction described in statement (B) is not correct because public issues frequently face over-subscription, leading to pro-rata allotment, contrary to the statement's claim.

Therefore, statement B provides a distinction that is not correct.

Revision Table: Public Issue vs. Rights Issue Key Differences

Additional Information on Share Issues

Understanding different types of share issues is crucial in finance. Beyond public issues and rights issues, companies can also raise funds through private placements, bonus issues (issuing free shares to existing shareholders), and stock splits. Each method serves a different purpose and targets a specific audience or achieves a particular corporate objective.

• Prospectus: A legal document required for public issues, providing details about the company, the offer, risks, and financial information.
• Letter of Offer: A document sent to existing shareholders detailing the terms of a rights issue, including the number of shares they are entitled to subscribe to and the issue price.
• Over-subscription: Occurs when the total number of shares applied for is more than the number of shares offered.
• Under-subscription: Occurs when the total number of shares applied for is less than the number of shares offered.
• Pro-rata Allotment: A method used during over-subscription where shares are allocated in proportion to the number of shares applied for.