(2) Unattractive Price Band Offered In A Given Rights Issue
It is one of the most popular reasons why retail investors refrain from rights issue. Every rights issue is meant to raise funds for the underlying company. It is done by offering additional new shares to existing shareholders.
Shareholders can buy additional new shares within a price band that is decided by the board of directors of the company. This price band can be available either at a reasonable discount, or at prevailing market price.
Sometimes, the price band can also be fixed for a price higher than market price. When the discount is negligible or is completely absent then it makes the offer quite unattractive for the shareholders.
It is due to the fact that potential investors can buy shares of underlying company at a cheaper rate from open market. Therefore, when price band of rights issue is unattractive small investors prefer to lapse their rights in the issue.
(3) Absence Of Readily Available Free Cash To Subscribe Rights Issue During Issue Period
It is one of the most significant reasons why retail investors refrain from rights issue. No issue remains open for subscription purpose for an indefinite amount of time. One has to subscribe for an issue within a prescribed time limit.
Rights issue is not a different issue in this regard. Existing shareholders can subscribe a given rights issue within a predetermined time limit.
During this time, if you don’t have readily available free cash then you can’t buy additional new shares. In such a case, unintentionally shareholders have to refrain from rights issue even when they want to buy those discounted shares.
Several of those shareholders may even opt to sell their rights to new investors for money. But, it is perhaps not possible if the rights issue is non-renounceable in nature.
Thus, retail investors have to refrain from a given rights issue.
- Reasons Why Small Investors Stay Away From Rights Issue: Shutterstock