Right shares vs bonus shares vs cash dividend: which actually builds wealth in NEPSE?

A friend opened MeroShare on a Saturday morning and saw a notification: Balephi Hydropower (BHL), 1:1 right share, Rs 100. He texted me: "Free shares?"

It was not free. He owned 100 shares of BHL bought at Rs 380 average. The offer meant he had until 1 January 2025 to wire Rs 10,000 to the company in exchange for 100 new shares at Rs 100 each. If he did nothing, his rights would be auctioned and the proceeds (after the strike price) would dribble back to him weeks later. His Rs 38,000 holding was about to either grow to Rs 48,000 or shrink to something less, depending on what he did in the next three weeks.

This is the part of NEPSE that confuses retail investors most. Right shares, bonus shares, and cash dividends get treated as the same thing, corporate goodies handed out at the AGM. Only two of the three are distributions to shareholders. The third is a capital call dressed up as a discount.

The one-line difference that matters

Set the tax tables aside for a moment. The single distinction that decides whether you should be excited or worried about a corporate action is the direction of cash flow.

Action	Cash flow direction	Who decides
Cash dividend	Company → your bank account	Company board, ratified by AGM
Bonus share	No cash flow; new shares credited to demat	Company board, ratified by AGM
Right share	Your bank account → company	Company board + SEBON approval; you choose to subscribe or not

Cash dividend and bonus share are distributions of past profit. The company already earned that money. The board is deciding how to send it back to you, either as cash or as fresh paper. Either way, no new wealth is created at the moment of the announcement; the company's book value falls by whatever it distributes.

A right share is a capital raise. The company wants more money than it has. It offers existing shareholders the first chance to put that money in, before opening it to the public. Section 56(8) of the Companies Act 2063 calls this the pre-emption right: existing shareholders get first refusal so their ownership percentage is not silently diluted by an outside placement.

So when you see a bonus or cash dividend, the company is saying "we earned money and here is your share." When you see a right share, the company is saying "we need money. Would you like to keep your slice by chipping in?"

The three mechanics side by side

	Cash dividend	Bonus share	Right share
Form	Cash to bank	New shares to demat	Option to buy new shares at Rs 100
Who pays	Company pays you	Company → IRD (5% tax)	You pay company (Rs 100 × shares)
Tax at distribution	5% withheld at source (Section 88)	5% on face value, paid by company	None at subscription
Tax at sale	N/A (already taxed)	5% (>365 days) / 7.5% (≤365 days) on gains	5% (>365 days) / 7.5% (≤365 days) on gains
Effect on market price	Drops by dividend amount	Drops per dilution formula	Drops per TERP formula
Effect on WACC at CDSC	None	Always reduced (enters at Rs 0)	Reduced only if WACC > Rs 100
Decision required from you	None	None	Subscribe / renounce / let lapse
Subscription window	N/A	N/A	35 days minimum (Section 56(11))

For the tax mechanics of bonus vs cash dividend (the 5% withholding, the cash dividend that is actually the tax on the bonus), see the older post: Bonus share vs cash dividend in Nepal. The rest of this post covers the corner that post does not: the right share.

Why "Rs 100 right share at market Rs 500" is not free money

The most common misunderstanding I hear in NEPSE chat groups is that buying right shares at Rs 100 when the market price is Rs 500 means an instant 5× gain. It does not, because the market price adjusts downward the moment the book closes.

The Nepal-adjusted formula, published by ShareSansar, is:

Adjusted price = (Market price + Right% × Subscription price) / (1 + Right%)

Worked example. Buddha Bhumi Hydropower (BNHC) closed at Rs 526.20 the day before its 1:1 right at Rs 100 (Feb 2026 adjustment).

Adjusted price = (526.20 + 1.00 × 100) / (1 + 1.00) = 626.20 / 2 = Rs 313.10

If you owned 100 shares at Rs 526.20 (worth Rs 52,620) and you subscribed to all 100 rights at Rs 100 each (paid Rs 10,000), you now own 200 shares at adjusted price Rs 313.10, worth Rs 62,620. Your total invested is Rs 52,620 + Rs 10,000 = Rs 62,620. You are neither richer nor poorer. The "discount" was a wash.

What if you did not subscribe? Your 100 shares are now worth 100 × Rs 313.10 = Rs 31,310. You lost Rs 21,310 of paper value with nothing to show for it. The auction may return some of that to you, but only some.

That is the entire point of the TERP adjustment: it forces equality between subscribers and non-subscribers at the moment of book closure. The real returns come later, from whether the underlying business does something useful with the capital.

What actually happens if you do not subscribe

Three options exist during the right-subscription window:

1. Subscribe. Pay Rs 100 × your eligible right shares into the company's collection bank within the 35-day window. New shares are credited to your demat within a few weeks.

2. Renounce. Formally transfer your right to someone else. Nepal does not have an active renouncement-letter market (unlike India, where right entitlements trade on the exchange), so this option is mostly theoretical. If you can find a buyer privately, fine.

3. Let it lapse. Do nothing. Once the window closes, SEBON regulations require the company to auction unsubscribed rights through a sealed-bid process, minimum bid Rs 100. The premium above Rs 100 is collected by the company and distributed pro-rata to the shareholders whose rights went unsold.

One real auction. Tehrathum Power had 418,738 right shares go unsubscribed after a 1:1 issue. The company auctioned them through Nabil Investment Banking with a sealed-bid window of 11 to 19 Bhadra, minimum bid Rs 100. Whatever bidders paid above Rs 100 was distributed to the original non-subscribers.

The catch with letting it lapse: you give up control, you wait weeks, and the auction price depends on what other investors are willing to pay, which is usually less than the implied TERP value. Three things can happen and only one is good:

• Auction clears at a healthy premium → you get most of your TERP loss back.
• Auction clears at exactly Rs 100 (no premium) → you get nothing.
• Auction undersubscribes too → the unsold portion is forfeited and you get nothing.

Subscribing is the path that preserves your TERP value. Letting lapse is a wager on the auction.

The capital allocation question

Once you understand that the right share is a capital call, the right question to ask is not "should I take the free money?" It is: "Do I want to put more cash into this specific company at Rs 100, given everything else I could do with that money?"

A quick framework. You are about to send Rs X to the company. Compare three uses for the same Rs X:

1. Subscribe. Your money goes to the company. Return depends on whether they deploy it well.
2. Buy more shares on the open market post-adjustment. Same exposure, different price; sometimes the post-adjustment market price sits below the right-share strike price plus brokerage, in which case the open market is cheaper.
3. Skip and invest elsewhere. Fixed deposit at 8% to 11%, a different NEPSE position, or sitting on the cash as your emergency fund.

The right-share offer is not a separate asset class. It is a forced rebalancing toward one specific stock at a specific price. Treat it as such.

When right shares destroy shareholder value

The 2015 NRB capital-increase circular is the textbook example. Commercial banks were told to raise paid-up capital from Rs 2 Arba to Rs 8 Arba, a 4× increase, by mid-July 2017. Banks did this through every available tool: bonus shares, right shares, FPOs, mergers. For two years, BFIs flooded the market with new equity that the underlying businesses had not yet figured out how to use.

The consequence was textbook capital misallocation. EPS fell because earnings were the same but share count was 4× higher. ROE fell because equity was 4× higher with no immediate income to match. Share prices fell across the sector as buyers worked out that the new capital was not earning its keep.

One concrete case. Narayani Development Bank pre-rights price was Rs 1,336.65; after the book-closure adjustment, the NEPSE-adjusted price fell to Rs 718.33, a 46% nominal drop. TERP math explains some of that, but the longer-term drift was real: shareholders who did not exit on time saw the post-adjusted price drift down further as the bank struggled to deploy the new capital.

A Kathmandu Post op-ed by Paban Raj Pandey in 2021 put it sharply: "money that could — and should — have gone to the corporate coffers is going to the shareholders' pockets." He pointed out that right shares at Rs 100 par create a perverse incentive: management has reason to encourage undersubscription, because the auction premium goes to the company rather than to subscribers. He also noted that NRB later prohibited microfinance institutions from using right shares because the tool had become a routine capital-raise rather than a tool for genuine expansion.

The takeaway is not "right shares are bad." It is: right shares from a company with no clear use for the cash are a slow leak in your portfolio. Read the rights-issue prospectus before you write the cheque. If the use-of-proceeds section is vague ("for general business purposes, working capital and other expansion"), be sceptical. If it is specific ("Rs X Arba to fund Phase 2 of project Y, expected commercial operation date Z"), the math is cleaner.

WACC at CDSC: why bonus always helps and rights only sometimes do

MeroShare and CDSC compute your weighted-average cost (WACC) as total capital invested ÷ total shares held. The rate at which a corporate action enters the WACC calculation matters a lot:

• Bonus shares enter at Rs 0. You did not pay for them, so they always pull WACC down.
• Right shares enter at Rs 100. They pull WACC down only if your existing WACC is above Rs 100. If your existing WACC sits below Rs 100 (rare for actively-traded listed stocks, but possible for old IPO holdings), they actually pull WACC up.
• Cash dividend does not change WACC at all. You received cash, not shares.

A worked example for clarity. Your starting position:

	Shares	WACC	Total invested
Original	100	Rs 500	Rs 50,000

A 100% bonus and a 100% right are both declared. After the bonus alone:

	Shares	WACC	Total invested
After 100% bonus	200	Rs 250	Rs 50,000

After the right alone (you subscribe to all 100 rights, paying Rs 10,000):

	Shares	WACC	Total invested
After 100% right	200	Rs 300	Rs 60,000

The bonus is cheaper because you did not pay for it. The right is cheaper than buying on the open market only when the open market is above Rs 100.

Why does WACC matter? At sale, your capital gains tax on shares is computed as (sale price − WACC) × shares × 5% or 7.5%, deducted automatically by your broker through CDSC. A lower WACC means a larger taxable gain. Bonus and right shares both inflate your taxable gain in different ways: bonus more, right less. For tax planning, hold long enough (over 365 days from the date of credit) to get the 5% long-term rate rather than the 7.5% short-term rate.

What you actually need to know

1. Cash flow tells you what kind of action it is. Cash dividend pays you. Bonus changes nothing material. Right share asks you for money. Treat the three differently.
2. The "Rs 100 discount" on right shares is a TERP adjustment, not free money. The market price drops to make subscribers and non-subscribers equal at the moment of book closure. The real return comes from what the company does with the cash afterwards.
3. Right shares from a company with a clear use of proceeds are a normal capital-allocation decision; right shares from a company forced to raise capital with no plan are slow leaks. Read the prospectus, especially the use-of-proceeds section. If you have already decided you do not want more of this company, the math says skip the right and let it auction, or sell the existing position before book closure.

If you have specific holdings you are unsure about, or you want a second opinion on whether to subscribe to a particular right offering, email me at parjanya57@gmail.com.

This post is part of the Nepal Money Basics guide — the investing section.