Bonus Shares, Right Shares and Cash Dividends, Explained

NEPSE companies reward shareholders in three main ways: cash dividends, bonus shares and right shares. Each changes the share price in a predictable way — and each produces a "drop" on the chart that panics new investors every season, even though nobody lost anything. This guide explains all three, shows the exact formulas NEPSE uses to adjust the price, and works through real-sized examples.

Book closure: who gets what

Before any dividend, bonus or right is distributed, the company announces a book closure date. On that date it closes its register of shareholders to decide who is entitled. To be on the register you must own the shares by then — and because a purchase takes a couple of trading days to settle into your DEMAT account, you need to buy a few trading days before the book closure date, not on it. The company's notice gives the dates; check it rather than cutting it fine.

Around that time NEPSE adjusts the share's price for any bonus or right issue — the ex-date — so that the price on the screen reflects the new number of shares.

1. Cash dividends

A cash dividend is money paid per share out of the company's profit. It is announced as a percentage of the face value, which is Rs 100 for most NEPSE shares. So a "10% cash dividend" is Rs 10 per share, whatever the market price.

• Tax is deducted at source before the money reaches your bank account — 5% for individuals at the time of writing. Your dividend statement shows the exact deduction.
• The dividend is paid to the bank account linked to your DEMAT after the AGM approves it.

Why the price falls by about the dividend

NEPSE does not adjust prices for cash dividends, but the market does it on its own: once the right to the dividend is fixed, the share is worth that much less, because the cash is about to leave the company. In NepseIQ's records of NEPSE book closures since 2011, shares with a cash-only distribution lagged the market by about 3% over the five sessions before book closure — almost exactly the average cash dividend of about 3.2% of the price. The value moved from the share price into shareholders' bank accounts. Nothing was lost, even though the chart shows a fall.

2. Bonus shares

A bonus share is a dividend paid in extra shares instead of cash. A "10% bonus" gives you 10 new shares for every 100 you hold, credited to your DEMAT. The company's value has not changed — the same company is now divided into more shares — so each share is worth proportionally less. NEPSE adjusts the price on the ex-date:

Adjusted price = price before ÷ (1 + bonus %)

Example: a share closes at Rs 550 before a 10% bonus. The adjusted price is 550 ÷ 1.10 = Rs 500. If you held 100 shares, you had Rs 55,000 worth; now you hold 110 shares at Rs 500 — still Rs 55,000. The "9% drop" on a raw chart is just the same money spread over more shares.

A tax is due on bonus shares too; the company handles it when it distributes them. Bonus shares are how many Nepali banks and insurers have grown their capital, and they reward patient holders by compounding the share count.

3. Right shares

A right share is an offer to existing shareholders to buy new shares, usually at face value (Rs 100), in proportion to what they hold. A "1:1 right" lets you buy one new share for each share you own; "10:5" lets you buy 5 for every 10.

• Right shares are not free: you pay for each one, by applying through Meroshare during the offer window.
• If you do not apply in time, you lose the right — and because new shares are usually issued well below the market price, not applying costs you value (see below).

Because new shares enter at the issue price, NEPSE adjusts the market price down to the weighted average of the old shares and the new ones:

Adjusted price = (price before + rights ratio × issue price) ÷ (1 + rights ratio)

Example: a share closes at Rs 526.20 before a 1:1 right issue at Rs 100. The adjusted price is (526.20 + 1 × 100) ÷ 2 = Rs 313.10. On a raw chart that looks like a 40% crash. In fact, if you held 100 shares (Rs 52,620) and paid Rs 10,000 for 100 right shares, you now hold 200 shares at Rs 313.10 — Rs 62,620, exactly what you had plus what you paid in.

If you did not take up the right, you still hold 100 shares, now priced around Rs 313 — the discount on the new shares went to those who did subscribe. That is why skipping a right issue when the market price is far above the issue price is expensive.

Bonus and right together

When a company issues both at once, NEPSE combines them in one formula:

Adjusted price = (price before + rights ratio × issue price) ÷ (1 + bonus % + rights ratio)

Example: a share at Rs 600 with a 20% bonus and a 50% right at Rs 100: (600 + 0.5 × 100) ÷ (1 + 0.2 + 0.5) = 650 ÷ 1.7 = Rs 382.35.

Why charts must be adjusted

On an unadjusted chart, every bonus and right issue looks like a crash. That does more damage than giving a fright:

• Returns are wrong. "Down 35% in a year" may really be up 10% once a bonus and a right are accounted for.
• Indicators are wrong. Moving averages, RSI and MACD spanning the ex-date are dragged by a fall that never happened, producing false sell signals.
• The 52-week high and low are wrong, because the high before the ex-date is on the old scale.

NepseIQ's charts are adjusted: prices before each bonus or right ex-date are scaled with the formulas above, so a bonus never reads as a fall in price, and every indicator and return is computed on the adjusted series. Your portfolio is different — what you paid and what a holding was worth on a given day stay as they actually traded, because that is what your money did.

Quick comparison

None of the three is free money, and none is a loss. Each moves value between the share price, your share count and your bank account. Read them on an adjusted chart and the "drops" disappear.

Follow dividend, bonus and right announcements on the NepseIQ news feed, and see how each affects your holdings — and your tax — in My Stocks.