In fact, any company trying to price its public issue higher than its market price is being silly. For that matter any company trying to price any of its products higher than the market price is being silly. It should be obvious, that in such a case the investor (or the customer) will eject the offered share (or the product) outright, unless the higher price is qualitatively justified or he is ill informed. True, there have been many instances following the free pricing policy where companies have priced their issues higher than the market price. But these are errors of judgment, which a company soon comes to learn and learns to correct. However, one important reason for the propensity of companies to price their shares unduly high may be attributed to their mistaken notion that the higher the price at which a company issues its shares, the lower its cost of capital.
Men who should know better, for example, our chief executives of companies and development banks, have frequently gone on record saying that under free pricing it is cheaper to raise equity than debt. Such statements are made on the argument that while a debenture issue involves a cost of around 18% to 19%, the cost of raising equity can be as low as 3% (for example, when a company paying 30% dividend on a share with a par value of Rs.10 is issued at Rs.100, that is at or near the market price of the share). According to this notion, the abolition Controller of Capital Issues (CCI – an official of the Ministry of Finance, a position now abolished) has reduced the cost of raising capital significantly. … Read the rest