Bonus and Right Shares on NEPSE: How Price Adjustment Works

A common message from new investors goes like this: "I bought a bank's shares, and the day after book closure the price fell 20%. What happened?" Usually nothing bad happened at all. The company issued bonus or right shares, and the price was adjusted.

Understanding that adjustment helps you avoid two expensive mistakes: panicking at a price drop that is only arithmetic, and ignoring a right issue that you should have applied for.

Book closure: the date that decides eligibility

When a company announces a bonus or right issue, it also sets a book closure date. Shareholders recorded in the company's register by that date receive the entitlement. Shares bought afterwards do not carry it.

Trades take time to settle into your account, so buying on the book closure date itself is usually too late. Check the exact cut-off with your broker or the company's notice, rather than relying on a rule of thumb.

Bonus shares: same company, more pieces

A bonus share is a dividend paid in shares instead of cash. The company converts part of its reserves into share capital and gives existing shareholders extra shares in proportion to what they hold. A 20% bonus gives you 20 new shares for every 100 you own.

The company does not receive any money and its business does not change. It is the same pie cut into more slices. So after book closure, the price is adjusted down to reflect the extra shares:

Adjusted price = price before book closure ÷ (1 + bonus ratio)

Worked example

You own 100 shares. The last price before book closure is Rs 660, and the company has declared a 10% bonus.

	Before	After
Shares held	100	110
Price per share	Rs 660	Rs 660 ÷ 1.10 = Rs 600
Value of holding	Rs 66,000	Rs 66,000

The price fell by Rs 60, and your holding is worth exactly the same. Whether the price later rises or falls depends on the market, not on the bonus itself.

The small cash dividend that comes with a bonus

You will often see announcements like "10% bonus shares and 0.526% cash dividend". The odd-looking cash figure is usually there to pay tax.

Dividends from listed companies, including bonus shares, are taxed at source. A company cannot withhold tax from shares, so it declares just enough cash to cover the tax on the whole distribution. At a 5% tax rate, the cash needed is 5% of the total, bonus plus cash:

cash = 0.05 × (bonus + cash), so cash = bonus × 0.05 ÷ 0.95

For a 10% bonus, that is 10 × 0.05 ÷ 0.95 ≈ 0.526%. The cash is withheld as tax, and you receive the bonus shares. Check the current tax rate and each company's notice, because rates and practice can change.

Right shares: you pay to keep your share of the company

A right issue is different. The company is raising new money, and it offers new shares to existing shareholders first, in a fixed ratio and at a fixed price. In Nepal, right shares are commonly issued at the face value of Rs 100, often well below the market price.

Because new shares are sold below market price, the price is adjusted after book closure to blend the old price with the issue price:

Adjusted price = (market price + ratio × issue price) ÷ (1 + ratio)

Worked example

You own 100 shares at Rs 450. The company offers right shares at 1:1, one new share for each share held, at Rs 100.

If you apply for your 100 right shares:

	Before	After
Shares held	100	200
Money paid	—	Rs 10,000 for the rights
Price per share	Rs 450	(450 + 1 × 100) ÷ 2 = Rs 275
Value of holding	Rs 45,000	200 × 275 = Rs 55,000

You paid Rs 10,000 and your holding grew by Rs 10,000. You are exactly where you started.

If you do not apply:

	Before	After
Shares held	100	100
Price per share	Rs 450	Rs 275
Value of holding	Rs 45,000	Rs 27,500

Your shares are adjusted down like everyone else's, but you did not receive the cheap new shares. On paper, you have lost Rs 17,500. This is the most expensive mistake in this whole topic.

Applying for right shares

Right shares are applied for through Mero Share, using your bank account linked for applications, during the subscription window the company announces. Make sure the funds are in the account before you apply. If you cannot or do not want to invest more, the main way to avoid the loss above is to sell before book closure, while the price still includes the value of the right.

Right shares that existing shareholders do not take up are typically sold by the company afterwards, for example through an auction.

What changes in the ratios

After a bonus or right issue, there are more shares, so per-share figures change:

• EPS falls, because the same profit is spread over more shares.
• Book value per share falls after a bonus. After a right issue, it moves toward the issue price.
• P/E and P/B should be compared on adjusted figures. Comparing this year's diluted EPS with last year's undiluted EPS will make the company look worse than it is.

When you analyse a company that has issued bonus or right shares, use the adjusted price history and adjusted per-share figures, which most charting tools and NEPSE's own data provide.

The bottom line

Bonus shares do not make you richer at the moment they are issued, and the post-book-closure price drop does not make you poorer. Right shares are different: if you hold through book closure, applying protects the value of your holding. Read every bonus and right announcement carefully, note the book closure date, and run the adjusted-price formula before you react to the price.

This article is for education only and is not investment advice. Confirm book closure dates, ratios and tax treatment with the company's official notice and NEPSE.