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HomeTaxExplained: Tax implications of rights issue

Explained: Tax implications of rights issue

Rights issues, a capital raising strategy for companies, offer existing shareholders the privilege to purchase new shares at a discounted price. While the financial benefits are well-documented, navigating the intricacies of tax implications surrounding rights issues can be a complex endeavour.

What is a Rights issue?

A rights issue is a financial term referring to a corporate action in which a company offers its existing shareholders the opportunity to purchase additional shares of the company’s stock at a predetermined price within a specified time frame. 

This issuance allows current shareholders to maintain their proportional ownership in the company and can be a way for the company to raise additional capital without resorting to other forms of financing. Rights issues are often structured in proportion to existing shareholdings, ensuring fairness and equitable treatment of shareholders.

What things are involved?

  1. Existing Shares Taxation
  2. New Shares Taxation
  3. RE Renunciation
  4. Purchase by RE Renouncee

Existing Shares Taxation

When it comes to existing shares, the taxation remains unchanged. The cost of acquisition is the same as the purchase price, and the period of holding is calculated from the original purchase date. Long-term capital gains (LTCG) are taxed at 10%, while short-term capital gains (STCG) are taxed at 15%.

New Shares Taxation

For newly acquired shares through a rights issue, the acquisition cost is determined by the rights issue price offered by the company. The period of holding starts from the date of acquisition and capital gains are taxed accordingly. LTCG is taxed at 10%, while STCG is taxed at 15% on gains above Rs 1 lakh.

Right Entitlement Renunciation

Renunciation of rights entitlements involves transferring or selling the rights to other investors. From a tax perspective, the cost of acquisition for the renouncee is nil, and the period of holding starts from the date of RE credit in the Demat account. Capital gains are treated as STCG and taxed at either 15% on market transactions or at slab rates for off-market transactions.

Purchase by RE Renouncee

When purchasing rights entitlements from the secondary market, the buyer becomes the renouncee. The cost of acquisition includes the purchase price plus the RE price paid. The period of holding begins from the date of allotment, and capital gains are subject to taxation based on whether they are LTCG or STCG, with rates mirroring those mentioned above.

Understanding the tax implications of rights issues is crucial for investors navigating these capital-raising events. By considering the taxation aspects outlined above, investors can make informed decisions and optimize their investment strategies.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.
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