Equity Dilution, Pre-Emption and Underwriting

What is dilution?

If a company issues additional shares - that is, it adds to its share capital - the total number of outstanding (or issued) shares increases. This can have a "dilution" impact on a current shareholder-the percentage of ownership reflected by their shareholding would decrease.

Why is Pre-emption required?

They are required to offer shareholders the right to participate in issues of shares to avoid being diluted. In certain jurisdictions, there are limitations on the discount that new shares can be issued as another way to mitigate the dilutive impact of new share issues.

These rights and requirements are enshrined into the listing rules applicable to stock exchanges located in those countries. The ​rules usually also permit the issuance of up to a small percentage of a Company’s existing share capital (say, 5 or 10 per cent) without being required to offer pre-emption rights to existing shareholders.

What is Underwriting for equity capital raising?

Underwriting for equity capital raising is where investment banks (or sometimes investors) agree to acquire the issuer’s shares at a particular price. This is useful where an issuer requires certainty that it will be able to raise a minimum amount of funding.

What are the types of Underwriting?

• Hard Underwriting - It is where the underwriters agree prior to the launch of the transaction to purchase any unsold shares, come what may.
• Soft Underwriting - It is where the underwriters only agree to purchase unsold shares once a book of demand has been established for the equity raise.