## Rights Shares on Equity Investment

### What Are Rights Shares?

The company offers existing shareholders the right to buy additional shares at a discounted price before offering them to the public. Shareholders can:

Subscribe — pay the issue price and receive more shares
Renounce (sell the right) — transfer the right to a third party for a consideration

### AS 13 Treatment

#### 1. If Rights Are Subscribed

Shares acquired; record at the subscription price paid.

```

Investment in Equity Shares A/c Dr (subscription price × shares subscribed)

To Bank A/c

```

These shares are included in WAM going forward.

#### 2. If Rights Are Renounced (Sold)

Proceeds from renouncement are credited to Profit & Loss A/c.

```

Bank A/c Dr (renouncement consideration)

To Profit & Loss A/c (treated as income)

```

> Critical: Renouncement proceeds go to P&L, NOT to the Dividend column. Do not record renouncement income as dividend income.

#### 3. Partly Subscribed, Partly Renounced

Apply both treatments proportionately to the respective portions.

### Rights Ratio

Example — 1 right share for every 3 held:

$$\text{Total rights} = \text{Total shares held} \times \frac{1}{3}$$

If 60% subscribed and 40% renounced:

Subscribed = Total rights × 60%
Renounced = Total rights × 40%

### WAM After Rights Subscription

New WAM includes the subscribed right shares at their subscription cost:

$$\text{New WAM} = \frac{\text{Old total cost + Subscription paid}}{\text{Old shares + Subscribed right shares}}$$

Bonus shares already held at NIL are also carried forward in the denominator.

Worked example

### Example 1

Example 1 — Rights 1:3, 60% Subscribed, 40% Renounced

Date	Transaction	Shares	Rate	Amount
01 Apr X1	Opening balance	10,000	₹11	₹1,10,000
01 Jul X1	Purchase	5,000	₹12	₹60,000
Before rights		15,000		₹1,70,000

Rights announced on 01 Nov X1 in ratio 1:3 → Total rights = 15,000/3 = 5,000 shares @ ₹8 each

Decision	Shares	Calculation	Amount
Subscribed (60%)	3,000	3,000 × ₹8	₹24,000
Renounced (40%)	2,000	2,000 × ₹2	₹4,000 (profit)

Journal entries:

```

[Subscription]

Investment in Equity Shares A/c Dr 24,000

To Bank A/c 24,000

[Renouncement]

Bank A/c Dr 4,000

To Profit & Loss A/c 4,000

```

After subscription:

	Value
Total shares	15,000 + 3,000 = 18,000
Total cost	₹1,70,000 + ₹24,000 = ₹1,94,000
WAM	₹1,94,000 ÷ 18,000 = ₹10.78/share

Investment Ledger (extract):

Particulars	Shares	Amount	Particulars	Shares	Amount
To Bal b/d	10,000	1,10,000	31-Mar-X2 By Bal c/d	18,000	1,94,000
To Bank (Purchase)	5,000	60,000
To Bank (Right shares)	3,000	24,000
Total	18,000	1,94,000

### Example 2

Example 2 — Combined Bonus + Rights (Complex)

Opening balance: 50,000 shares @ ₹15 = ₹7,50,000

Date	Event	Shares	Amount
20 Jun X1	Purchase 10,000 @ ₹16	+10,000	+₹1,60,000
Before bonus		60,000	₹9,10,000
01 Aug X1	Bonus 1:6 → 10,000 shares @ NIL	+10,000	₹0
Before rights		70,000	₹9,10,000

WAM after bonus = 9,10,000 ÷ 70,000 = ₹13/share

Rights announced (3:7) on 01 Nov X1 → Total rights = 70,000 × 3/7 = 30,000 shares

2/3 subscribed = 20,000 shares @ ₹15 = ₹3,00,000
1/3 renounced = 10,000 shares → P&L

Final holding:

Shares: 70,000 + 20,000 = 90,000
Cost: ₹9,10,000 + ₹3,00,000 = ₹12,10,000
New WAM: ₹12,10,000 ÷ 90,000 = ₹13.44/share

⚠️ Common exam mistakes

Recording renouncement proceeds in the Dividend column instead of P&L — renouncement is not dividend income; it is profit from transfer of a right.
Adding renouncement proceeds to the Investment Account (thereby reducing cost) — AS 13 requires it in P&L, not as a cost reduction.
Forgetting to apply the rights ratio to the post-bonus share count — rights are always calculated on the current total holding, including bonus shares already received.
Recording the full rights entitlement (subscribed + renounced) as investment shares — only the subscribed portion increases the share count in the Investment A/c.
Using pre-rights WAM for subsequent sales without updating it to include subscribed right shares.

Bare-Act text Para 17 (Rights Shares) · AS 13 — Accounting for Investments · click to expand

When rights to subscribe for additional shares or debentures are received on an investment, and the investor exercises his option to subscribe, the cost of the additional shares or debentures is added to the carrying amount of the investment. Where the rights are renounced in favour of a third party for a consideration, such consideration is credited to the profit and loss account.

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AS 13 — Rights Shares: Subscription and Renouncement

Worked example

⚠️ Common exam mistakes