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IAI Actuarial Core Principles · Business Finance · Structure and methods of financing a company

A listed Indian company wants to raise equity from existing shareholders without diluting their proportionate ownership. Which method best achieves this?

A rights issue is the best method, because new shares are offered to existing shareholders in proportion to their current holdings. Anyone who takes up their entitlement keeps the same percentage ownership. Public offers, preferential allotments and warrants to outsiders bring in new holders and dilute existing stakes.

  1. AA public offer to new investors
  2. BA rights issue offered pro rata to existing shareholdersCorrect
  3. CA preferential allotment to a single investor
  4. DIssue of warrants to a foreign investor only
  5. An employee stock option grant to directors

Explanation

In a rights issue, new shares are offered to existing shareholders in proportion to their holdings. Those who take up their rights keep their percentage ownership. The other methods place shares with new parties or specific persons, which dilutes existing holders' proportions.

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