Behind Vodafone Idea rights issue deep discount is a tested strategy

Academic research shows that a rights issue that’s priced at a deep discount does not signal negative information about a company’s equity value. A deep discount is often used by companies to ensure full subscription to the issue, as this paper published in the Journal of Financial Economics points out.

Still, equity investors are often puzzled when they are faced with a deeply discounted rights issue. So when Vodafone Idea Ltd announced a rights issue price of ₹12.50 per share, which was nearly a 60% discount to prevailing prices, public investors seemed a bit at sea. Vodafone Idea shares first fell by about 7% intraday, before recovering those losses and eventually ending the day 3.3% higher at ₹33.10.

Investors eventually warmed up to the rights issue price on the belief that the discount would do the trick and attract enough non-promoter shareholders.