Which transaction allows existing shareholders to avoid dilution of shares?

A rights issue is a specific type of transaction that enables existing shareholders to maintain their proportionate ownership in a company and avoid dilution of their shares. In a rights issue, the company offers additional shares to current shareholders at a specified price, usually lower than the market price. This allows shareholders to purchase extra shares in proportion to their existing holdings, thereby maintaining their percentage of ownership in the company.

When a rights issue is executed, existing shareholders can exercise their rights to buy the new shares, and if they choose not to take up the offer, they may risk dilution of their ownership percentage. However, if they do participate, they can effectively counteract any dilution that might occur from issuing new shares to other investors.

This mechanism is particularly advantageous in situations where a company needs to raise capital for projects or to strengthen its balance sheet, allowing existing shareholders to invest further in the business without losing their stake.