InvestorQ : Will rights shares lead to dilution of equity as it is fresh issue of shares?
seema Upadhyaya made post

Will rights shares lead to dilution of equity as it is fresh issue of shares?

Answer
user profile image
Anu Biswas answered.
2 years ago


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.

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.