Escorts Finance decided against the preferential allotment to the promoters after a section of the share-holders wrote to the company saying that a this will not only dilute their share-holding, but also reduce their book value per share without providing them any gains, sources said.

The decision to float a 1:1 rights issue will be considered at the company's board meeting on Wednesday, prior to its annual general meeting, sources said.

It is understood that the company is floating a Rs 20-crore rights issue comprising equity shares of Rs 10 each for cash at par in the ratio of one share for every one share held.

Significantly, Escorts Ltd which holds around 18 per cent stake in the company's equity can subscribe to only its rights' entitlement, which works out to around Rs 4 crore. Financial institutionshad directed Escorts Ltd to subscribe to only its entitlement, and not pick up an additional amount, as was being planned by the company.

It is understood that the company has made arrangements with other promoter group companies to pick up the unsubscribed portion if the rights issue is undersubscribed.

Another reason for dropping the preferential allotment was that the company would have to seek the department of company affairs approval, which is time consuming, as the investment was over the 30 per cent ceiling.

At present, the Escorts group holds 48 per cent in the company's paid-up equity of Rs 20 crore.