Is free pricing of pubic issues are good or bad for investors

The answer depends upon whom we mean by “investors”?  Is investor the one who is already holding a share, that is, an existing shareholder, or one who is going to become a shareholder?  Unfortunately there has been some confusion in this regard.  To any reasonable person, it should be clear that is the existing shareholder who is the true investor since he has already invested.

Whenever a company makes a public issue of shares at a price, which is lower than the market value of the share, some part of the wealth gets transferred from the existing shareholder to the new shareholder.  It happens like this.  Consider a company with 1lakh shares outstanding, quoted in the market at Rs.50 each.  The total wealth of the existing shareholders can be said to be Rs.50 lakh.  If this company raises another Rs.10 lakh by issuing 50,000 shares at Rs.20 each, as used to be the case before free pricing, the share price of the company roughly falls down to Rs.40 (being (50 lakh + 10 lakh) / 105 lakh shares).  This means a loss of Rs.10 per share to the existing shareholders, amounting in all to Rs.10 lakh.

At the same time, this represents a gain to the new shareholders,.  Since their holding of 50,000 shares at the rate of Rs.40 each is now worth Rs.20 lakh and their investment was only Rs.10 lakh, the loss of 10 lakh to the existing shareholders becomes the gain to the new shareholders.

However, under free pricing regime, when a public issue of shares is made at the market price, say, Rs.40 in the above case, the existing shareholders suffer no net loss.  Nor do the new shareholders make any unreasonable gain at the cost of the former.

The advent of free pricing, needless to say is obviously good news to existing shareholders, though it may not appear as such to the new shareholders.  It is understandable if everybody likes an eldorado where one could buy a share for Rs.20 today and sell it a month later for Rs.50, as was the case earlier.  It is simply that no sensible and sustainable economy can work that way.  It is a wonder that w worked that way at all, all these years.

However, even a new shareholder must realize that before free pricing, precisely on account lf the bumper profit through the allotment of a share at a very low price, his probability of being allotted a share was also very low, since the extent of over subscription was very high.  As a result, used to be a very small fraction of the actual number of having gone down significantly, the probability of allotment has gone up, and an average new shareholder can expect a much larger fraction of the shares applied for being allotted.  Thus on the balance even he may not be so badly off.