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Anti-Dilution

Anti-dilution means to control the reduction of prices and voting right. Dilution of stock happens due to conversion of securities into shares or stock or issue of new equity shares. Stock dilution will decrease the % of ownership and EPS with conversion of debentures into shares. But by anti-dilution provision, company can protect existing shareholders.

Explanation

When a company issues new shares or convert bonds or debentures into equity shares, at that time, number of shares will increase. This will decrease the earning of per share and this will also decrease the price of per share. So, this is stock dilution. Now, if company gives some rights for buying existing shareholders of any new issue of shares. In case, conversion of debentures or preferences shares in equity shares, debenture holders or preference shareholders have to give some more payment for maintaining the earning or price of shares.

Example

For example A and B are the two shareholder of a company XYZ. They bought of $ 100 shares. A invested $ 50 and B invested $ 50. Per share value is $ 10. Now, company's management needs  more for new project. For getting more money fastly, company's management has option to decrease the price of per share. But company do not want to decrease the share value of A and B. So, company issues 2 shares to C at $ 15. With this anti-dilution provision, there will not any affect on the earning or value of existing shareholder.

Related : Right Shares 

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Accounting Education: Anti-Dilution
Anti-Dilution
Accounting Education
https://www.svtuition.org/2012/04/anti-dilution.html
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