Why a share price drops after a bonus or right issue

Every year, investors open their portfolio the morning after a book close and find a stock "down" 10% or more. Usually nothing went wrong. NEPSE adjusted the price because the company issued bonus or right shares, and the drop is matched by the extra shares you'll receive.

Book close: who gets the shares

When a company announces a bonus or right issue, it also sets a book close date. Investors who hold the shares at the end of the last trading day before the book close date are entitled to the bonus or rights.

• Buy on or before the last trading day before book close: you get the entitlement.
• Buy on the book close date or later: you don't. The price you pay is already adjusted.

The first trading day on or after the book close date is when the adjusted price applies.

The bonus share adjustment

A bonus issue gives existing shareholders free shares in proportion to what they hold. The company's value doesn't change, it's just split over more shares, so NEPSE lowers the reference price:

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

Example: a stock closes at Rs 566 on the last day before book close, with a 5% bonus.

Adjusted price = 566 ÷ 1.05 = Rs 539.05

If you held 100 shares, your holding was worth Rs 56,600. After the adjustment you'll have 105 shares at Rs 539.05, worth Rs 56,600.25. The value is the same; it's just spread over more shares.

The right share adjustment

A right issue lets existing shareholders buy new shares at a fixed price, usually Rs 100 (the face value), which is often well below the market price. NEPSE adjusts the price for that discount:

Adjusted price = (last price + 100 × right ratio) ÷ (1 + right ratio)

Example: a stock closes at Rs 600 before book close, with a 10:4 right issue (4 new shares for every 10 held, a ratio of 0.4).

Adjusted price = (600 + 100 × 0.4) ÷ 1.4 = 640 ÷ 1.4 = Rs 457.14

Unlike a bonus, a right issue only keeps your value whole if you pay for and take up the rights. Right shares on NEPSE can't be sold on to someone else, so if you don't apply during the subscription window, you simply miss out on the discount while the share price has still been adjusted down.

Cash dividends usually don't change the price

NEPSE doesn't adjust ordinary share prices for cash dividends. It only does so when the dividend is large relative to the price (around 10% of it or more), which in practice happens with mutual fund units, not company shares. A share may still trade lower after book close as the market prices in the paid-out cash, but there's no official adjustment.

When can you sell the new shares?

The adjusted price applies immediately, but the new shares take a while to arrive:

• Bonus shares reach your demat account and become sellable once NEPSE lists them, which often takes around three months after book close, sometimes longer.
• Right shares need you to apply and pay first, then wait for allotment and listing, which usually takes longer than a bonus.

Until then you'll see fewer shares than you're entitled to, at the lower price. That's the main reason a portfolio looks like it lost value right after a book close.

Tax on bonus shares

Bonus shares are taxed at 5% of their face value when issued. On a 5% bonus from 100 shares (5 new shares of Rs 100 face value), that's Rs 25. Companies usually declare a small cash dividend alongside the bonus to cover this tax, so many investors never notice it.

Charts and adjusted prices

Price charts usually show adjusted history: past prices are divided by the same factor so the bonus doesn't look like a crash. If you compare an old newspaper price with a chart today, the chart will look lower. That's the adjustment, not an error.

Tools

• The adjusted price calculator works out the post-bonus or post-rights price for any ratio.
• The dividend calculator shows the tax on cash dividends and bonus shares.
• Upcoming book closures are listed under dividends on the NepseLytics dashboard.

This article explains how corporate actions work in general terms. It isn't investment advice.