Question

This route is best suited for companies who would like to raise capital without diluting the stake of its existing shareholders.

• A. Initial Public Offering (IPO)
• B. A follow on public offering
• C. Rights Issue
• D. A Preferential issue

Hint:

Remember: Rights Issue = Right of existing shareholders to maintain their stake. No dilution if they exercise their rights. IPO and FPO = New shareholders = Dilution.

Answer 1

The Correct Option is C

Step 1: Understand the concept of shareholder dilution.
Shareholder dilution occurs when a company issues new shares, reducing the ownership percentage of existing shareholders. Different methods of raising capital have different effects on existing shareholders' stake.

Step 2: Define each type of share issuance.

Initial Public Offering (IPO): The first time a company offers its shares to the general public. It dilutes the stake of existing shareholders as new investors are brought in.

Follow on Public Offering (FPO): An issuance of additional shares by an already publicly listed company to new investors. This also dilutes existing shareholders' stake.

Rights Issue: An offering of additional shares to existing shareholders in proportion to their current holdings. Shareholders can buy new shares at a discounted price, maintaining their ownership percentage if they exercise their rights.

Preferential Issue: Issuance of shares to a select group of investors (like institutional investors or promoters) at a predetermined price. This typically dilutes existing shareholders' stake.

Step 3: Analysis of each option.

(A) Initial Public Offering (IPO): Incorrect. IPO brings in new public shareholders, which dilutes the stake of existing shareholders.

(B) A follow on public offering: Incorrect. FPO also brings in new investors, leading to dilution of existing shareholders.

(C) Rights Issue: Correct. In a rights issue, shares are offered first to existing shareholders. If all shareholders exercise their rights, their ownership percentage remains unchanged. This method allows companies to raise capital without diluting the stake of existing shareholders if they participate.

(D) A Preferential issue: Incorrect. Preferential allotment is made to specific investors, which dilutes the stake of other existing shareholders.

Step 4: Conclusion.
A rights issue allows existing shareholders to maintain their proportional ownership in the company while the company raises additional capital.

Final Answer: (C) Rights Issue