(6) Substantial Transaction Costs Or Tax Obligation For Investors
It is one of the most shocking reasons why several investors prefer not to buy rights shares. Securities transactions in stock markets are not as easy as one might think at first sight. They do carry certain hidden charges or transaction costs associated with them.
For example, there are substantial transaction costs even for institutional shareholders for buying rights shares in UK. This ultimately makes a rights issue quite unattractive for a number of institutional investors.
Similarly, shareholders seeking to buy discounted shares in a rights issue would also need to consider the related tax impact. For example, in India, first-in-first-out rule is used for the purpose of computing capital gains tax.
Therefore, buying discounted shares in a rights issue for selling them subsequently may trigger significant tax obligations on them. Therefore, several investors would not prefer to buy rights shares just to sell them in short term.
This strategy is adopted simply to avoid paying of capital gains tax on their profits earned.
(7) Lack Of Demand Of Shares In Secondary Market
It is one of the most shocking reasons why several investors prefer not to buy rights shares. Every security needs to be in demand from majority of investors to be successful in market. If a security is not in demand then a new issue is unlikely to be taken-up by investors.
Rights issue also works in a similar pattern. If shares of an underlying company are not in demand from majority of investors then they will prefer to stay away from rights issue.
This diminishing demand of shares can be due to temporary reasons or even permanent reasons. Sometimes, overall market sentiments also plays a major role in making or breaking a given rights issue.
If market sentiments are extremely bearish then investors may opt to stay away. However, they may opt to buy rights shares when market sentiments are extremely bullish.
Thus, investor’s behavior & demand towards a rights issue is largely affected by overall market sentiments.
- Reasons Why Small Investors Stay Away From Rights Issue: Shutterstock