NISM-Series-XV: Research Analyst · Corporate Actions

Rights Issues and Theoretical Ex-Rights Price Explained

Updated 11 October 2026 · Fact-checked

A rights issue offers existing shareholders new shares in proportion to their holding, usually at a discount. The theoretical ex-rights price (TERP) is the expected share price after the issue: (cum-rights value of old shares + money raised) ÷ total shares after the issue. Value of a right = TERP − issue price, per share.

Understand Rights Issues and Theoretical Ex-Rights Price

A rights issue is a way for a listed company to raise money from its existing shareholders. The company offers new shares to them in proportion to what they already hold. Shareholders on the record date get the offer. The issue price is usually below the market price, which makes the offer attractive.

The offer is written as an entitlement ratio, such as 1:4. This means 1 new share for every 4 shares held. If you hold 400 shares, you can apply for 100 new shares. You pay the issue price for them. In India, rights issues are made under SEBI's issue regulations and the Companies Act. The offer stays open for a limited period, and shareholders get a letter of offer and an application form.

You have three choices. You can subscribe to all your rights. You can renounce them, which means selling or transferring the right to someone else. Or you can let them lapse. Renunciation is possible because the right to buy at a discount has value. Rights entitlements (REs) are credited to demat accounts and can be traded on the exchange during the renunciation window. Check the workbook for exact timelines before the exam; do not guess them.

Why does the price fall after the issue? The company adds new shares at a price below the market. So the total value is spread over more shares. The market price before the issue is the cum-rights price. The price after the rights are detached is the ex-rights price. The theoretical ex-rights price is the weighted average of the old market price and the issue price. It assumes the market value of the company changes only by the cash raised.

The value of a right is the gain a holder gets from the discount. It equals TERP minus the issue price, for each new share. A holder who does not take up the offer and does not sell the right loses out, because the price drop is real but the discount gain is not claimed. Rights issues do not change a subscribing holder's total wealth in theory. They only change the number of shares held and the price per share.

Key formulas to remember

Theoretical ex-rights price (TERP): TERP = (N × Pcum + n × Pissue) ÷ (N + n); N = old shares in the ratio, n = new shares in the ratio, Pcum = cum-rights market price, Pissue = rights issue price.
TERP for ratio 1:k: TERP = (k × Pcum + Pissue) ÷ (k + 1); Use for 1 new share for every k held. For 2 new for 5 held, use the general formula instead.
Value of a right (per new share): Value of right = TERP − Pissue; Value for one new share. It is positive when TERP is above the issue price.
Value of a right (per old share held): Value per old share = (Pcum − Pissue) × n ÷ (N + n); Equals the fall in price per old share, Pcum − TERP.
Fall in price: Pcum − TERP; Expected price drop per old share on the ex-rights date.
Funds raised: Funds raised = new shares issued × issue price; Gross amount before issue expenses.
Entitlement: New shares = holding × n ÷ N; Round as per the company's stated treatment of fractions. Check the question.

How to solve Rights Issues and Theoretical Ex-Rights Price questions

Use the same sequence for any rights issue question. Read the ratio carefully before you calculate.

1Write down the cum-rights price, the issue price and the entitlement ratio.
2Identify N (old shares) and n (new shares) from the ratio. In 2:5, 2 new shares for every 5 held, n = 2 and N = 5.
3Compute the total value of the bundle: N × Pcum + n × Pissue.
4Divide by (N + n) to get TERP.
5If asked for the value of a right, subtract the issue price from TERP for one new share. If asked per old share held, use Pcum − TERP and scale as needed.
6If asked for funds raised or shares issued, multiply the entitlement by the holding or total shares, then by the issue price.
7Check the answer: TERP must lie between the issue price and the cum-rights price.

Quickest way: Weighted average shortcut

When to use it: Use it when a question gives only the price, issue price and ratio and asks for TERP or the value of a right.

Treat TERP as a weighted average. Weights are N for the old price and n for the issue price.
TERP = Pissue + N × (Pcum − Pissue) ÷ (N + n). This starts from the issue price and adds the weighted gap.
Value of a right = TERP − Pissue = N × (Pcum − Pissue) ÷ (N + n) for one new share.
Quick check: TERP is closer to the price that has more weight.

Common mistakes in Rights Issues and Theoretical Ex-Rights Price

Swapping N and n in the formula.
The ratio is read as old:new when the question says new:old.
Fix: Read the words. '2 for 5' means 2 new for 5 held. Write N = 5, n = 2 before you start.
Taking a simple average of the market price and the issue price.
Students forget the weights of old and new shares.
Fix: Always weight each price by the number of shares at that price.
Calling TERP the value of a right.
Both numbers appear in the same question.
Fix: TERP is a share price. The value of a right is TERP minus the issue price, per new share.
Mixing value per new share and value per old share.
Two formulas look similar.
Fix: Read what the question asks. Per new share: TERP − Pissue. Per old share: Pcum − TERP.
Assuming TERP is the actual market price after the issue.
The word 'theoretical' is overlooked.
Fix: TERP is an estimate. The real price depends on market conditions and how investors view the use of funds.
Thinking that not taking up rights costs nothing.
Students ignore dilution.
Fix: A holder who neither subscribes nor sells the right loses value because the price falls and the discount gain is not claimed.

Worked examples

Example 1

A company's shares trade at ₹250 cum-rights. It offers a rights issue of 1 new share for every 4 held at ₹150 per share. Find the TERP and the value of a right per new share.

Show the solution

N = 4, n = 1, Pcum = ₹250, Pissue = ₹150.
Value of bundle = 4 × 250 + 1 × 150 = 1,000 + 150 = ₹1,150.
Total shares = 4 + 1 = 5.
TERP = 1,150 ÷ 5 = ₹230.
Value of a right per new share = 230 − 150 = ₹80.

Answer: TERP = ₹230 and the value of a right is ₹80 per new share.

Example 2

A shareholder holds 1,000 shares of a company trading at ₹120 cum-rights. The company offers 3 new shares for every 5 held at ₹60. Find the TERP, the number of new shares offered to this holder, and the funds this holder pays if they subscribe in full.

Show the solution

N = 5, n = 3, Pcum = ₹120, Pissue = ₹60.
Value of bundle = 5 × 120 + 3 × 60 = 600 + 180 = ₹780.
Total shares = 5 + 3 = 8.
TERP = 780 ÷ 8 = ₹97.50.
New shares = 1,000 × 3 ÷ 5 = 600.
Amount payable = 600 × 60 = ₹36,000.

Answer: TERP = ₹97.50. The holder is offered 600 new shares and pays ₹36,000.

Exam tips

Check the ratio wording first. Most lost marks come from reading 'new for old' the wrong way round.
Check the result: TERP must lie between the issue price and the cum-rights price. If it does not, you made an error.
Know the terms: record date, cum-rights, ex-rights, renunciation and lapse. Questions often test these definitions directly.
Know the difference between the value of a right per new share and the price fall per old share.
Do not rely on memory for timelines or limits. Use only what the NISM workbook states.

Practice questions from Corporate Actions

Rights Issues and Theoretical Ex-Rights Price in other exams

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

ACCA Applied SkillsEquity Finance and Share Issues

Rights Issues and Theoretical Ex-Rights Price: frequently asked questions

How do I calculate the theoretical ex-rights price?

Find the total value of the old shares at the cum-rights price and add the money raised from new shares. Divide by the total number of shares after the issue. For 1 new for 4 held, TERP = (4 × cum price + issue price) ÷ 5.

What is the value of a right?

It is the benefit of buying a new share at the issue price instead of the expected market price. Per new share, it equals TERP minus the issue price. It is positive when the issue is at a discount.

What is renunciation of rights?

Renunciation means giving up your right to subscribe, in favour of another person, usually by selling the rights entitlement. It lets you get value from the discount without paying for new shares.

Is TERP the price the share will actually trade at?

No. It is a theoretical estimate based on a weighted average. The actual price depends on market conditions and views on how the funds will be used.