Given the nuances associated with issuing shares at a price below fmV or without consideration, the effective implementation of the anti-dilution provisions poses many difficulties. If certain exceptions are not introduced into existing legislation, effective implementation in India could be a challenge, particularly for foreign investors. Large weighted average protection measures are typical of early equity financing and founders should expect them to be proposed and required by many investors. To the extent that the entity can avoid cheaper margins and other issuance of shares in non-exempt transactions, these specific provisions should not prejudice the founders. However, other types of anti-diluting, which are less common, may be more harmful to the founders. These must be carefully considered before agreeing with them. A complete ratchet anti-dilution clause offers the greatest protection to investors. Nevertheless, it is a restrictive covenant. This type of clause protects existing shareholders from dilution when a new share issue is issued at a lower price than the price originally paid by the existing shareholder.
In practice, ratchet control ensures that existing shareholders retain their percentage at no additional cost if the company creates additional financing cycles. This result is achieved by reducing the conversion price so that existing shareholders can convert their preferred shares into a certain percentage of common shares. In this case, the shareholder receives more shares for his first investment. Anti-dilution provisions are sometimes referred to as “subscription rights,” “pre-emption rights” or “subscription privileges.” Anti-dilution rules are particularly relevant for convertible preferred shares. Suppose you buy a preferred share of the private company XYZ for $15 per share. The preferred share is convertible, which means that you have the right to trade a share of the preferred shares against a common share. Before we move on to dilution, we need to understand the concept of dilution. Dilution is the decrease in a shareholder`s interest in a company due to the increase in the number of shares outstanding. If z.B. a company receives a subsequent investment cycle, the percentage of participation of existing investors will be diluted.