Right shares on PSX: subscribe, sell, or lapse
What a PSX rights issue is, how the letter of right (LOR) trades, what a right is worth, and subscribe vs sell vs lapse worked through with numbers.
A rights issue is a company asking its existing shareholders for new money. It offers you new shares in proportion to what you already hold, at a fixed subscription price, for a limited time. You then have three choices: subscribe (pay and receive the new shares), sell the entitlement on PSX, where it trades for a few weeks as a letter of right (LOR) under the company’s symbol with an R suffix, or do nothing and let it lapse. The first two preserve the value of your position, at least in theory; the third gives part of it away. This post covers what a right is, how the dates run, how the subscription price sets what a right is worth, and the three choices with numbers.
What a rights issue is
Under the Companies Act 2017, when a company issues new shares for cash it must, as a rule, first offer them to existing members in proportion to their holdings; that pre-emption right is what a rights issue exercises. The board approves the issue, the offer document is published, and the terms are announced through PSX in the usual corporate-action format. SECP’s regulations on further issues of shares set the disclosure and process rules, and the offer document, not the headline, is where the purpose of the money is stated.
The headline reads like a bonus announcement but means something different. “25% (R) at Rs 60” is an offer of 25 new shares for every 100 you hold, at Rs 60 each. The percentage is a ratio of shares, and the rupee figure is what you pay per new share. The subscription price is often set below the prevailing market price to make the offer worth taking up, but it can be at face value (par) or at a premium; the discount is a design choice by the company, not a rule.
Right shares differ from a bonus issue in the one way that matters: a bonus costs you nothing, a right costs you the subscription money. And they differ from a cash dividend in direction: money flows from you to the company, not the other way.
The dates, in order
A rights issue has more dates than a dividend, and the last one is the one that catches people.
- Announcement. The board approves; ratio, price and book closure are published.
- Buy-by date and ex-date. Same logic as a dividend under T+1 settlement: the register is read at the start of book closure, the ex-date is the last trading day before that, the buy-by date the day before. From the ex-date the share trades without the right, and PSX adjusts the reference price. Ex-date vs book closure vs record date walks through the calendar.
- Letters of right credited. After book closure, the entitlement appears in your CDC sub-account as a separate security, the LOR, in the number of new shares you may subscribe for.
- LOR trading window. For a period set out in the offer, the LOR trades on PSX like any other security, under the company’s symbol with an R on the end. This is where the “sell” choice happens.
- Last date of payment. The deadline to pay the subscription money for any LOR you hold, whether you received it as a shareholder or bought it on the exchange. After this date unpaid rights lapse.
- Allotment and credit. The company allots the new shares and they are credited to CDC accounts, usually some weeks after the payment deadline. The LOR line disappears and your ordinary share count rises.
Unsubscribed shares do not go unissued. Rights issues on PSX are usually underwritten, so shares that lapse are taken up by the underwriters at the subscription price.
What a right is worth: subscription price vs market
The value of a right comes from the gap between the market price and the subscription price. The standard way to estimate it is the theoretical ex-rights price (TERP), the weighted average of the old shares at market and the new shares at the subscription price.
Take an example company trading at Rs 100 that announces a 25% right at Rs 60. For an investor with 100 shares:
- Old shares: 100 × Rs 100 = Rs 10,000
- New shares: 25 × Rs 60 = Rs 1,500
- TERP = (10,000 + 1,500) ÷ 125 = Rs 92
So after the right the share should, in theory, trade around Rs 92, and each right, which lets you buy a Rs 92 share for Rs 60, is worth about Rs 32. That is the level the LOR would trade near if the market agreed with the theory. In practice the LOR’s price moves with the share price and is more volatile than it, because a small move in the share is a large fraction of the Rs 32 gap; and LOR trading can be thin, so the quoted price is not always one you can deal at in size.
The three choices, worked through
Same investor: 100 shares bought at Rs 80 (total cost Rs 8,000), market Rs 100, 25% right at Rs 60, TERP Rs 92, right worth roughly Rs 32.
| Subscribe | Sell the letter | Let it lapse | |
|---|---|---|---|
| Cash paid (−) or received (+) | −Rs 1,500 | +Rs 800 (25 × Rs 32) | Rs 0 |
| Shares after | 125 | 100 | 100 |
| Value at TERP | Rs 11,500 | Rs 9,200 | Rs 9,200 |
| Value plus cash movement | Rs 10,000 | Rs 10,000 | Rs 9,200 |
| Total cost | Rs 9,500 | Rs 8,000 | Rs 8,000 |
| Average cost per share | Rs 76.00 | Rs 80.00 | Rs 80.00 |
| Share of the company | Unchanged | Reduced | Reduced |
Subscribe. Pay Rs 1,500, hold 125 shares worth about Rs 11,500. Your value plus the cash you spent is the Rs 10,000 you started with; you have converted cash into shares at the offer price and kept your percentage of the company. Your average cost blends the old Rs 80 with the new Rs 60: Rs 9,500 ÷ 125 = Rs 76.
Sell the letter. Sell 25 LOR at about Rs 32, receive about Rs 800, hold 100 shares worth about Rs 9,200. Value plus cash is still Rs 10,000. You keep your cash and accept a smaller slice of a bigger company.
Let it lapse. Do nothing. Hold 100 shares worth about Rs 9,200 and receive nothing. The Rs 800 that the entitlement was worth has passed to whoever took up the shares. This is the only choice that loses value on the day, and it is the default if you do not act.
You can also mix: subscribe to some LOR and sell the rest, which is a common way to fund a partial take-up with the proceeds. Every number above is theoretical; the actual share and LOR prices during the window are set by the market, and the point of the table is the structure, not the rupees.
Dilution, in plain terms
If a company with 1,000,000 shares issues 250,000 more, an investor with 1,000 shares who does not subscribe goes from owning 0.10% of it to owning 0.08%. Profit per share, dividend per share and voting weight are all spread over 25% more shares. That is dilution, and the discounted subscription price is the compensation the company offers for it. Subscribing keeps your percentage; selling the letter is being paid for giving it up; lapsing is giving it up unpaid.
The trap: buying rights and forgetting to pay
A letter of right bought on the exchange is an unpaid right. It is not a share and it does not turn into one by itself. Whoever holds the LOR on the last date of payment must pay the subscription amount, through their broker or as the offer document directs, or the right lapses and the money paid for the LOR on the exchange is lost. The same applies to LOR you received as a shareholder: the entitlement in your CDC account is a claim, not a share, until the subscription is paid.
So the operative deadline is not the end of the LOR trading window but the last date of payment, and the two are not the same day. Check the offer document for both, and check the dividend calendar, which lists right issues alongside dividends and bonuses with their dates.
Cost basis and the tracker
Subscribing changes your average cost in a specific way: the new shares come in at the subscription price and blend with your existing cost. In the example, Rs 8,000 of old cost plus Rs 1,500 of new cost across 125 shares is Rs 76 per share. Recording the new shares as a purchase at the market price instead would overstate your cost by Rs 800 and understate your gain by the same amount; recording the subscription as a purchase at Rs 60 is correct.
If you sold the letter, your 100 shares are unchanged, and the Rs 800 is either a realised gain in its own right or, in some conventions, a reduction of the cost of the shares you kept. Either treatment is defensible; the point is to use one consistently. For capital gains tax on the LOR sale itself, NCCPL computes the figure under its own rules.
On Equivest’s portfolio tracker, an announced right on a symbol you hold shows a cost-basis preview against your actual position: new shares = shares + shares × ratio, with an average cost blended with the subscription price, so the “what will my position look like if I subscribe?” question is answered before the payment date rather than after.
Three choices, one deadline that matters, and a value that is yours until you let it lapse.
Education, not investment advice.