Rights Share
A rights share is an invitation to existing shareholders to purchase additional new shares of a company directly at par value (usually NPR 100), in proportion to their existing shareholdings.
Detailed Explanation
When a publicly listed company requires substantial fresh cash to pay off bank loans, construct new infrastructure projects, or meet statutory regulatory capital minimums, it issues rights shares. Unlike an IPO which is open to the entire public, a rights issue is offered exclusively to current registered shareholders as a statutory right. If an investor owns 100 shares and a 1:1 (100%) rights issue is declared, they have the legal right to purchase 100 additional shares at NPR 100 each, regardless of how high the stock trades on NEPSE.
Why It Matters to You
A rights issue directly impacts your investment portfolio. If you apply for your allotted rights, you acquire shares at a deep discount to the market price. However, if you ignore the offering and fail to apply, your ownership stake will be diluted and your investment value will drop due to NEPSE’s post-rights price adjustment. In Nepal, shareholders must actively decide whether to fund the rights or sell shares before book closure.
Formula & Calculation
Adjusted Price = (Current Market Price + (Rights Ratio * Par Value)) / (1 + Rights Ratio)
Add the market price to the product of the rights ratio and the NPR 100 par value, then divide by 1 plus the rights ratio.
- Market Price = Share price before book closure
- Rights Ratio = Offered ratio as decimal (e.g. 1:0.5 = 0.50)
- Par Value = Subscription cost per share (NPR 100 in Nepal)
A stock trading at NPR 400 issues a 1:0.5 (50%) rights share at NPR 100.
Adjusted Price = (400 + (0.50 * 100)) / (1 + 0.50) = (400 + 50) / 1.50 = 450 / 1.50 = NPR 300.
Where It Is Commonly Used
- Hydropower companies raising fresh equity to complete construction delays
- Finance and microfinance institutions meeting NRB capital adequacy norms
- NEPSE rights application tab on MeroShare portal
- Public auction bidding for unsubscribed promoter and ordinary shares
Key Advantages & Limitations
Key Advantages
- Enables shareholders to acquire new shares at NPR 100 par value regardless of high market prices
- Protects existing shareholders against outside control and hostile takeovers
- Provides direct capital to the company without paying hefty commercial bank loan interest
- Zero underwriting broker fees or commissions when applying directly via C-ASBA
Limitations & Risks
- Requires shareholders to inject fresh out-of-pocket cash
- Failing to apply results in direct wealth destruction due to NEPSE price adjustment
- Substantially increases market share supply, often depressing long-term stock prices
- Frequently used by poorly managed companies simply to repay bad commercial debt
Common Misconceptions & Beginner Traps
Rights shares are a free gift just like bonus shares.
Rights shares are never free. You must pay NPR 100 per share from your bank account to subscribe to your quota.
If you do not apply for your rights shares, nothing happens and you lose nothing.
Because NEPSE adjusts the market price downward on book closure, failing to apply causes severe capital dilution. Your shares are now worth less per unit.
Rights Share vs Initial Public Offering (IPO)
Existing shareholder subscription vs broad public market capital raising
| Dimension | Rights Share | Initial Public Offering (IPO) |
|---|---|---|
| Target Audience | Existing registered shareholders only | All Nepali citizens with Demat accounts |
| Allotment Guarantee | 100% guaranteed up to your allotted ratio | Lottery based (10 kitta system) due to oversubscription |
| Price Adjustment | Triggers official NEPSE price adjustment | No price adjustment; establishes new listing |
Hydropower Rights Wave and the Unsubscribed Auction Market in Nepal
In recent years, SEBON permitted numerous listed hydropower companies to issue 50% to 100% rights shares specifically to pay off high-interest bank consortium loans. While this clears debt from the company's books, it requires shareholders to continuously pump new personal cash into the company. Many retail investors fail to monitor book closure dates or lack spare liquidity, leading thousands of rights shares to lapse unapplied. These unclaimed units are subsequently auctioned by merchant bankers, where savvy institutional and high-net-worth investors bid slightly below market price to acquire large blocks of stock.
- Rights shares require you to invest fresh money at NPR 100 per share.
- If you don’t plan to apply, sell your shares before book closure to avoid price adjustment loss.
- Applications must be submitted through MeroShare C-ASBA before the closing deadline.
- Unsubscribed rights shares are sold via open competitive public auction.
Real-World Practical Scenario
Sita owns 200 shares of a hydropower company trading on NEPSE at NPR 300 per share (Portfolio value = NPR 60,000). The company announces a 1:1 (100%) rights issue. On book closure morning, NEPSE adjusts the market price: Adjusted Price = (300 + 100) / 2 = NPR 200 per share. Sita applies for her allotted 200 rights shares via MeroShare, paying NPR 20,000 (200 * NPR 100). Her new portfolio consists of 400 shares at NPR 200 = NPR 80,000 (her original NPR 60,000 + NPR 20,000 new cash). If Sita had ignored the rights issue and failed to apply, she would still hold only 200 shares, but now valued at only NPR 200 = NPR 40,000, suffering a direct NPR 20,000 loss from dilution!
A rights issue is not an optional bonus; you must either subscribe with fresh cash to preserve your wealth or sell your holdings prior to the book closure date.
Key Takeaways & Summary
- A rights share invites existing shareholders to buy new shares at par value (NPR 100) based on an established ratio.
- NEPSE adjusts the market price downward on book closure morning.
- Shareholders must either fund their rights application or sell their holdings before book closure to avoid capital dilution.
- Unclaimed rights units are sold to the public through competitive sealed-bid auctions.
Where You’ve Seen This Term
This concept is actively referenced across the following RisePaisa lessons, guides, and interactive tools: