Meaning
Offering of new shares to existing stockholders at a fixed price permits the company to raise capital while giving current owners a chance to maintain their percentage of control. A dilutive rights issue lowers the value of individual shares because it increases the total number of units in circulation. If a shareholder lacks the funds to buy their portion, their influence over the company drops.
The board uses this mechanism to address urgent cash requirements without seeking a new lead investor.
Capital Expansion
Raising capital with this tool allows a firm to meet its obligations.
Equity Erosion
Failure to exercise the option to buy more shares results in a smaller slice of the overall business. For a founder, a dilutive rights issue can represent a loss of the ability to block certain board decisions. The cost in future wealth can be high if the business later succeeds and the missing percentage would have been worth millions.
Voting Power
Control over the direction of the firm depends on the number of votes a person can cast. A dilutive rights issue shifts this power toward those with the most ready cash. This mechanism ensures that the people who fund the next stage of growth have the most say in how that money is spent.
