(2) Bypass Difficulty In Buying Shares From Open Market Due To Smaller Float
It is one of the most common reasons why shareholders exercise rights to buy shares at issue price higher than market price. Stock liquidity is extremely necessary to enter & exit a script at desired levels. But, every stock is not liquid enough for this purpose.
It is perhaps true when the number of floating shares in a script is very less as compared to its rising demand. Rights issue provides a useful method to raise money & increase shares in the float.
Therefore, rights issue offered even at a price higher than market price is quickly taken-up by the investors. Thus, shareholders neglect the higher subscription price just to increase their shares in an attractive script.
(3) Enable Large Shareholders To Add More Shares Without Restrictions
It is one of the most authentic reasons why shareholders exercise rights to buy shares at issue price higher than market price. Buying of stocks by large shareholders particularly promoters is not as easy as buying of stock by small investors.
Stake increase by promoters is usually governed by stock exchange guidelines. Most of the stock exchanges don’t allow these insiders to buy shares of their own company above certain threshold levels.
In India, promoters can’t by more than 5% stake within their own company in a given financial year. Rights issue provides an easy solution to this major hurdle of insiders.
It enables large shareholders, insiders, & friendly shareholders to add to their existing position without breaking regulatory guidelines. Thus, these big investors or institutions never hesitate to buy shares from a rights issue even at a higher price.
- Subscribe Rights Issue At Higher Than Market Price: Shutterstock