Corporate Accounting and Auditing · Issue, Forfeiture, Rights, Bonus, Sweat Equity, ESOP and Buy-back of Shares

Right Shares: Section 62, Value of Rights and Entries

Updated 10 October 2026 · Fact-checked

Right shares are new equity shares a company first offers to its existing equity shareholders in proportion to their holding, under Section 62(1)(a). To solve a problem, find the number of shares offered, the amount due, the ex-rights price and the value of a right, then pass the usual share issue entries.

Understand Right Shares

A company that wants more capital can issue new shares. Section 62 says that, when it increases its subscribed capital, the shares must first be offered to existing equity shareholders in proportion, as nearly as circumstances admit, to the paid-up capital on their shares. This protects them from losing their percentage of ownership. Such an offer is a rights issue.

The offer is made by a notice that states the number of shares offered. The notice must give a time of not less than fifteen days (or such lesser number of days as may be prescribed) and not more than thirty days from the date of the offer. If the offer is not accepted within that time, it is deemed declined. The notice must be dispatched by registered post, speed post, electronic mode, courier or any other mode with proof of delivery, at least three days before the issue opens.

Unless the articles provide otherwise, the offer includes a right to renounce the shares in favour of another person, and the notice must say so. If shareholders decline, or the time expires, the Board may dispose of the shares in a manner that is not disadvantageous to the shareholders and the company.

Rights shares are usually offered at a price below the market price. So the right to buy them has a value. That value is the value of a right. A shareholder who does not want to subscribe can renounce the right and sell it. A shareholder who does neither loses value, because the ex-rights price falls.

Section 62 also allows other routes: shares to employees under an ESOP (special resolution), or to any persons by special resolution at a price fixed by a registered valuer's report. Section 62 does not apply to a conversion of debentures or loans into shares if the terms were approved earlier by a special resolution (Section 62(3)). Accounting for the money is the same as any share issue. Any premium goes to the securities premium account (Section 52). Under Section 126, if a transfer is pending registration, the rights offer for those shares is kept in abeyance.

Key rules to remember

Number of rights shares: Rights shares = Existing shares × (New shares ÷ Old shares in the ratio); For a 1 for 4 offer on 8,00,000 shares: 8,00,000 × 1 ÷ 4 = 2,00,000 shares.
Theoretical ex-rights price: Ex-rights price = (Old shares × Cum-rights price + New shares × Issue price) ÷ (Old shares + New shares); Use the ratio numbers, for example 4 old and 1 new. This is a weighted average.
Value of a right (per new share): Value of right = Ex-rights price − Issue price of rights share; This is the gain on one new share.
Value of a right (per old share held): Value per old share = Cum-rights price − Ex-rights price; It equals the per-new-share gain × New shares ÷ Old shares in the ratio.
Entry for premium: Securities premium = Premium per share × Number of shares issued; Credit to Securities Premium Account (Section 52(1)), including premium received on rights shares.
Section 62(1)(a) offer period: Not less than 15 days (or such lesser days as prescribed) and not more than 30 days; Counted from the date of the offer. Notice must be dispatched at least three days before the issue opens.

How to solve Right Shares questions

Use this order for any rights issue question. Write each figure on its own line so the examiner can award step marks.

1Read the ratio (for example 1 for 4) and the issue price. Split the issue price into face value and premium.
2Find the number of rights shares: existing shares × ratio. Then find the total amount to be received.
3Check the payment schedule (application, allotment, calls). Note how much of the premium is due at each stage.
4If asked for the value of a right, compute the ex-rights price by the weighted average, then take the difference.
5Pass the journal entries: Bank to Share Application, transfer to Share Capital and Securities Premium, then allotment and calls as needed.
6If a shareholder renounces or sells rights, show the sale proceeds and the gain or loss separately from the share entries.
7Show the Share Capital and Securities Premium balances after the issue and state the total cash received.

Quickest way: Weighted average for the value of a right

When to use it: Use it when a question asks only for the ex-rights price or value of a right, and no entries are needed.

Write the ratio as old : new, for example 4 : 1.
Total value = (old × market price) + (new × issue price).
Divide by (old + new) to get the ex-rights price.
Value of right per old share = market price − ex-rights price.
Check: (ex-rights price − issue price) ÷ old shares in ratio × new shares should give the same figure.

Common mistakes in Right Shares

Crediting the whole issue price to Share Capital
Students forget that the rights price may include a premium.
Fix: Split the price into face value and premium first. Credit face value to Share Capital and premium to Securities Premium Account.
Dividing by the wrong number when finding the ex-rights price
Students divide by the old shares only, or add the issue price once for all shares.
Fix: Multiply each side by its number in the ratio and divide by old plus new shares, as in the formula.
Mixing up the value of a right per new share and per old share
Both are called the value of a right.
Fix: Read the question wording. Per new share is ex-rights price minus issue price. Per old share is cum-rights price minus ex-rights price.
Treating rights shares like bonus shares
Both go to existing shareholders in a ratio.
Fix: Rights shares are paid for in cash and raise funds. Bonus shares are free and are paid up out of reserves. Rights entries need a Bank debit.
Stating the offer period wrongly
Students recall only a fixed number of days.
Fix: Write it as Section 62(1)(a)(i) states: at least fifteen days (or such lesser days as may be prescribed) and not more than thirty days from the date of the offer.
Saying rights can always be renounced
Students forget the condition.
Fix: State that renunciation is allowed unless the articles provide otherwise, and the notice must mention this right.

Worked examples

Example 1

The equity shares of Sudarshan Ltd are quoted at ₹30 cum-rights. The company offers rights shares in the ratio of 1 for every 4 held, at ₹15 per share. Find the ex-rights price and the value of a right, per old share and per new share.

Show the solution

Ratio: 4 old shares and 1 new share.
Value of 4 old shares at ₹30 = 4 × 30 = ₹120.
Cash paid for 1 new share = ₹15.
Total value of 5 shares = 120 + 15 = ₹135.
Ex-rights price = 135 ÷ 5 = ₹27.
Value of right per old share = 30 − 27 = ₹3.
Value of right per new share = 27 − 15 = ₹12.
Check: ₹12 gain on 1 new share spread over 4 old shares = ₹3 per old share.

Answer: Ex-rights price ₹27. Value of a right is ₹3 per old share held, or ₹12 per new share.

Example 2

Kaveri Ltd has 8,00,000 equity shares of ₹10 each, fully paid. It offers rights shares in the ratio of 1 for 4 at ₹14 per share (₹10 face value plus ₹4 premium). Payment: ₹4 on application and ₹10 on allotment (including the premium). All shareholders accept and pay in full. Pass the journal entries.

Show the solution

Rights shares = 8,00,000 × 1 ÷ 4 = 2,00,000 shares.
Application money = 2,00,000 × ₹4 = ₹8,00,000.
Allotment money = 2,00,000 × ₹10 = ₹20,00,000. Premium = 2,00,000 × ₹4 = ₹8,00,000.
Share Capital: ₹8,00,000 (application) + ₹12,00,000 (allotment share, ₹6 per share) = ₹20,00,000, which is 2,00,000 × ₹10.
Entry 1: Bank A/c Dr ₹8,00,000, to Share Application A/c ₹8,00,000.
Entry 2: Share Application A/c Dr ₹8,00,000, to Equity Share Capital A/c ₹8,00,000.
Entry 3: Share Allotment A/c Dr ₹20,00,000, to Equity Share Capital A/c ₹12,00,000 and to Securities Premium A/c ₹8,00,000.
Entry 4: Bank A/c Dr ₹20,00,000, to Share Allotment A/c ₹20,00,000.
Check: total cash = 8,00,000 + 20,00,000 = ₹28,00,000 = 2,00,000 × ₹14.

Answer: Cash received is ₹28,00,000. Equity Share Capital increases by ₹20,00,000 and Securities Premium increases by ₹8,00,000.

Exam tips

Write the ratio, number of new shares and total amount due before any entry. These lines usually carry step marks.
For MCQs, check if the question asks the value of a right per old share or per new share. The two figures differ.
Quote Section 62(1)(a) conditions in short theory answers: proportion, notice of 15 to 30 days, right to renounce, Board's power to dispose of declined shares.
Show premium separately in every entry and mention Section 52 for the Securities Premium Account.
In comparison questions, give four points: purpose, cash inflow, source of payment and effect on reserves.

Practice questions from Issue, Forfeiture, Rights, Bonus, Sweat Equity, ESOP and Buy-back of Shares

Right Shares in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Right Shares: frequently asked questions

What is the difference between right shares and bonus shares?

Right shares are offered to existing equity shareholders for cash, so the company raises funds. Bonus shares are issued free to members, out of reserves such as securities premium, so no cash comes in. Rights shareholders may renounce their offer, while bonus shares are simply allotted.

How do I calculate the value of rights?

First find the ex-rights price as a weighted average of the cum-rights price and the issue price. Then value of a right per old share is cum-rights price minus ex-rights price. Per new share it is ex-rights price minus issue price.

What does Section 62 of the Companies Act, 2013 say about a rights issue?

Section 62(1)(a) requires further shares to be offered first to existing equity shareholders in proportion to their paid-up capital. The notice must give at least fifteen days (or such lesser days as prescribed) and not more than thirty days to accept. The right to renounce is included unless the articles say otherwise.

Where is the premium on rights shares credited?

Section 52(1) requires premium received on shares to be transferred to the securities premium account. So the premium on rights shares is credited there, not to Share Capital.