In bonus and splits, the overall capital structure does not really change. But rights are slightly different because they entail the issue of fresh shares and hence to that extent they lead to dilution of equity. Remember, rights issue is a fresh issue of shares to existing shareholders. Hence it will lead to increase in the number of equity shares outstanding. Since the profits will remain the same, the profit will now get distributed across more number of shares and hence the EPS will fall. Of course, the company’s estimate is that it will be able to utilize the funds to substantially increase its profits and thus improve its EPS over time. Here is how the dilution of equity happens in the event of a rights issue.

Particulars

Pre-Rights Issue

Particulars

Post-Rights Issue

Pre-Rights Shares

5,00,000 shares

Post Rights Shares

7,00,000 shares

Pre Rights Profit

Rs.1,25.00,000

Post Rights Profit

Rs.1,25,00,000

Pre Rights EPS

Rs.25/share

Post Rights EPS

Rs.17.86/share

Rights ratio

2:5

As can be seen in the above table, the rights issue has actually led to the EPS falling. As mentioned earlier, the company projects that the capital infusion will more than compensate for this fall in EPS. That is one of the key reasons why these rights are issued at a discount to existing shareholders to make it attractive to them.