Understanding Dilution

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Quote from Prof. Bakshi's articles:

Once upon a time, not very long ago, Indian investors loved
companies that liked to visit the capital markets regularly to raise
equity capital. The mere announcement of prominent companies' plans to
tap the markets in the near future was enough to make their stock
prices zoom up. For, investors were eager to invest in companies that
could dream up grand projects that required huge amounts of capital.
The earnings of such companies, that were generated by pouring capital
into capital-intensive projects were assigned high price-earnings
ratios.
The pendulum has now swung the other way. Today, companies who
visit the capital market are shunned by investors. The mere
announcement of a company's plans to tap the market is enough for its
stock price to plummet. Investors expect companies to finance their
growth through internally generated funds. The term "earnings per share
dilution" has become a dirty word in the Indian stockmarkets.

Understanding Dilution

Originally posted by basant

Originally posted by deveshkayal

I hate companies raising capital through rights issue simply bcoz dilution happens at lower price. 

Article in today's DNA says McNally targets 7000crs revenues by 2015. Such long term ambitions are hardly achieved by any company.

Rights issue is the best way to dolute equity. Existing shareholders get chance to participate and for the ones who do not they can always sell their Rights forms.

I'd skip a company that makes a QIP to buy a company that makes a rights issue. That is because the price at which the rights are coming is irrelevant for an equity shareholder (from the holistic point of view). Higher the price good for the company but it is coming from the stockholder's pocket and lower the price bad for the company but then the stockholder is not been creamed and unlike those QIP fellows the Rights subscribers are in no hurry to flip or rather buy and dump!

One company that has almost always made a rights issue and up several hundred fold is Karur Vysya Bank!