Discounts on share issues
Discount on shares is available only for small investors, hence the profit made will not be very large, writes Arnav Pandya.Updated: Jan 20, 2008 20:06 IST
The Securities and Exchange Board of India (SEBI) has granted permission to companies to price their issues at a discount for small shareholders. This could result in a situation where an individual shareholder can invest at a price that is lower than that paid by other investors. As a result the benefits for this class of shareholders would become more evident. Investors need to tackle this in an effective manner and here is how they can do it.
Quantum of the benefit
Whenever shares are issued at a discount it represents a benefit as far as the investor is concerned and hence first check out the extent of this benefit. The permission has been granted for a discount of up to 10 per cent for small shareholders or investors and this percentage will be the additional benefit. The discount that a company fixes will differ and this will have to be seen in the light of the situation to be able to calculate the benefit available.
One disadvantage of such a situation is that most people will think of only the immediate benefit available to a person. They will say that the extra discount gives us this benefit and hence we can sell the shares immediately and book the necessary benefit. This kind of thinking can be counter-productive in the long run because if this is a really good company then there is a chance of this multiplying several times over and at this stage the small discount can make a huge difference to the overall returns.
The benefit of a discount will be available only to those investors who fall into the 'small investor' bracket, which means an investment of less than Rs 1 lakh. This will be the eligibility criteria and hence one cannot take a large benefit out of the discount given. Investors have to temper their expectations accordingly and then make the necessary decision.
The calculation of discount is an integral part of the entire exercise. The discount will be given at a certain percentage of the price fixed for other categories of investors. This makes the discount percentage and the price fixed as important. It can also result in a situation where the small investors actually end up getting shares at a price that is lower than the lower-end of the price band that has been fixed for the issue.
The writer is a certified financial planner