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When a publicly listed company decides to expand equity capital, it typically issues additional shares to existing shareholders through either a Rights Issue or a Bonus Issue. While both corporate actions allocate additional equity in proportion to existing holdings, their financial impact on your bank account, share price dilution, and capital gains tax liability are vastly different.
A bonus issue distributes free shares funded directly from the company's accumulated reserves, requiring zero cash outflow from investors. In contrast, a rights issue grants existing shareholders a statutory privilege to purchase new shares at a discounted issue price, requiring fresh capital deployment or active trading of your Rights Entitlements (RE).
Key Takeaways
- Zero vs Fresh Capital: Bonus shares are distributed 100% free of cost from company reserves, whereas rights issues require you to pay a discounted subscription price per share.
- Share Price Dilution: Both corporate actions cause the market stock price to adjust downwards on the Ex-Date to account for the expanded share count.
- Rights Entitlement (RE) Expiry: Unexercised rights entitlements lapse at zero value if not subscribed via ASBA or sold on the stock exchange before the issue closes.
1. Interactive Rights Issue Valuation & TERP Engine
Calculate your exact post-issue portfolio value, Theoretical Ex-Rights Price (TERP), and the intrinsic value of your Rights Entitlements (RE) before making a subscription decision.
2. Core Differences: Rights Issue vs. Bonus Shares
Understanding the structural mechanics of both corporate actions is critical for portfolio risk management and cash flow planning.
Primary Objective
Cash Outflow for Investor
Company Balance Sheet Impact
Share Count Impact
Market Price Adjustment
Rights Entitlements (RE) Trading
Risk of Inaction
Governing Regulatory Framework
| Features & Metrics | Rights IssueCapital Infusion | Bonus SharesFree Reserve Capitalization |
|---|---|---|
| Primary Objective | Raise fresh cash from existing shareholders | Capitalize retained earnings & boost liquidity |
| Cash Outflow for Investor | Requires capital to buy shares at discounted price | ₹0 (Zero cash required) |
| Company Balance Sheet Impact | Increases total cash and equity base | Transfers funds from reserves to equity capital |
| Share Count Impact | Increases outstanding share count | Increases outstanding share count |
| Market Price Adjustment | Price adjusts down to Theoretical Ex-Rights Price (TERP) | Price adjusts down in exact bonus ratio (e.g. 1:1 halves price) |
| Rights Entitlements (RE) Trading | REs are credited to Demat and can be sold on exchange | Not applicable (direct share credit) |
| Risk of Inaction | Value loss if REs are neither exercised nor sold | Zero risk (shares credited automatically) |
| Governing Regulatory Framework | SEBI (ICDR) Regulations 2018 | Companies Act 2013 & SEBI LODR |
3. The Mathematics of Rights Issues (TERP & RE Valuation)
When a company announces a rights issue at a discount to its current market price, the stock price naturally drops on the Ex-Rights Date. This adjusted equilibrium price is known as the Theoretical Ex-Rights Price (TERP).
Theoretical Ex-Rights Price (TERP)
Equilibrium price after market dilution on the ex-rights date
Intrinsic Value of Rights Entitlement (RE)
Theoretical fair trading price of RE on the stock exchange
Practical ₹ Numerical Case Study
Suppose you own 100 shares of ABC Ltd trading at ₹220 (Cum-Rights). The board approves a 1:4 Rights Issue (1 new share for every 4 shares held) at an issue price of ₹140:
If you decide not to apply for the rights issue, you can sell your 25 REs on the stock exchange at approximately ₹64 each, recovering ₹1,600 in cash to compensate for the price dilution of your primary shares.
4. Income Tax Implications in India (Budget 2026/27 Rules)
Tax treatment differs sharply between rights entitlements, subscribed shares, and bonus allocations under the Income Tax Department Guidelines:
A. Taxation of Bonus Shares (Section 55)
- Cost of Acquisition (COA): Deemed to be ₹0 (Nil) for all bonus shares allocated on or after April 1, 2001.
- Period of Holding (POH): Measured strictly from the date of bonus share allotment, not from the purchase date of your original shares.
- Capital Gains: When sold, the entire sale consideration is treated as capital gain. If held for more than 12 months, gains above ₹1.25 Lakh are taxed at 12.5% LTCG (Section 112A). If held for 12 months or less, gains are taxed at 20% STCG (Section 111A).
B. Taxation of Rights Issues & Entitlements (RE)
- Subscribed Shares: Cost of acquisition equals the actual issue price paid (₹140 in our example). Holding period begins from the date of rights allotment.
- Sale of Rights Entitlements (Renunciation): When you sell your REs on the exchange, the cost of acquisition is ₹0 (Nil). The entire sale value is taxed as Short-Term Capital Gains (STCG) at 20%, regardless of how long you owned the underlying parent shares.
5. Strategic Playbook: 3 Options When a Rights Issue is Announced
When Rights Entitlements (RE) are credited to your Demat account (ISIN ending in RE), you must take one of three explicit actions before the issue closing date:
- Full Exercise (Apply for Rights): Submit an online application via ASBA (Application Supported by Blocked Amount) through your net banking portal. This protects your ownership percentage from equity dilution.
- Renounce / Sell on Exchange: If you do not wish to deploy fresh capital, sell your REs directly through your stockbroker terminal during the active trading window.
- Partial Renunciation: Apply for a portion of your entitlement and sell the remainder on the exchange.
The Cost of Inaction (Lapsing REs)
If you ignore the rights issue notice and neither apply nor sell your REs on the market, your REs will expire with zero value upon issue closure. You will suffer pure capital loss due to post-issue stock price dilution without receiving any monetary compensation.
6. Frictionless Trading & Corporate Action Tracking
Managing corporate actions, Rights Entitlements, and ASBA bidding requires an advanced, low-latency Demat platform with direct market access and real-time ledger settlement.
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7. Frequently Asked Questions (Regulatory & Tax FAQs)
Can I sell Rights Entitlements (RE) without applying for the rights shares?
Yes. Rights Entitlements are credited directly to your Demat account as temporary ISINs and trade on the stock exchange during the renunciation window. You can sell them just like normal shares. The proceeds are treated as Short-Term Capital Gains (STCG) taxed at 20% under Section 111A with zero cost of acquisition.
What is the Cost of Acquisition (COA) for Bonus Shares in India?
Under Section 55(2)(aa) of the Income Tax Act, the Cost of Acquisition (COA) of bonus shares allotted on or after April 1, 2001, is strictly deemed to be ₹0 (Nil). The entire sale proceeds will be subject to capital gains taxation upon disposal.
What happens if I ignore a Rights Issue and do nothing?
If you take no action, your Rights Entitlements (REs) will permanently lapse with zero value upon issue closing. You will suffer stock price dilution (TERP) on your existing holdings without receiving any cash compensation or fresh shares.
Do bonus shares dilute my ownership stake in the company?
No. Bonus shares are distributed proportionally to all existing shareholders for free out of the company's accumulated reserves. Your percentage equity ownership and voting power in the company remain exactly the same before and after the bonus issue.
8. Regulatory Compliance References
- Securities and Exchange Board of India (SEBI Statutory Framework) — Statutory rights issue pricing, fast-track eligibility, and entitlement credit rules.
- Income Tax Department (Section 55(2)(aa) — Cost of Acquisition for Rights & Bonus Assets) — Cost of acquisition determinations for bonus allotments and renounced rights entitlements.
- Reserve Bank of India (FEMA Non-Debt Instruments Master Directions) — Overseas corporate action entitlement frameworks and Demat remittance rules for NRI investors.
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