Promoters can bring rights issue for their own benefits. These personal benefits of promoters from a rights issue will help you to understand final outcome.
Rights issue is an excellent means to raise desired capital quickly in a cost-effective manner. It provides an option to all existing shareholders to buy additional new shares in a company at a predetermined price.
These shares are offered to all shareholders as per the record date on pro-rata basis i.e. in proportion to existing shares. But, every rights issue is not framed for the benefit of all shareholders including the company itself.
Some rights issues are designed to provide incentives to promoters of the company rather than small investors. These promoter-friendly rights issues are usually priced at a price equivalent or higher than prevailing market price of underlying stock.
This pricing mechanism makes the issue unattractive for small investors to exercise their rights. It is due to the fact that underlying stock is available cheaper in the open market as compared to the issue price.
As a result, majority of the rights lapse without any action. Finally, the “unsubscribed shares” are purchased by promoters to increase their stake in the company. Thus, a preplanned strategy of promoters to increase stake in the company becomes successful. Here are 11 promoter-friendly reasons or benefits behind a rights issue:
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(1) Circumvent Regulatory Provisions Of Creeping Acquisition
It is one of the most common personal benefits of promoters from a rights issue. Retail investors can easily increase their stake in a company without any difficultly. It is due to the absence of any form of regulatory provisions for them.
But, the process of stake increase is not an easy task for promoters. Several stock exchanges don’t allow promoters to increase their stake above certain threshold level on annual basis.
For example, in India, stock exchange regulator i.e. SEBI allows promoters to increase stake up to 5% only within a given financial year. However, acquisition made through rights issue is excluded from this limit.
Therefore, promoters find rights issue as a great way to circumvent regulatory provisions of creeping acquisition within a year. It is the reason why promoters bring unattractive rights issue for investors.
In this strategy, major portion of rights issue is subscribed by promoters which in turn boost their stake in the company. Thus, promoter’s stake is increased in the firm within stock exchange guidelines.
- Personal Benefits Of Promoters From A Rights Issue: Shutterstock