Rights Issues and FPOs

First published 21 Aug 2026 · Last verified 29 Aug 2026

"When a company asks existing shareholders for more money, the question is never simply whether to give it — it is whether the terms are fair, the capital will be used wisely, and you are being treated as an owner or a source of funds."

Capital formation is the lifeblood of any company's growth, and in Nepal's equity market, the methods through which listed companies raise additional capital follow patterns that are distinct from the practices of more mature exchanges. For the investor navigating the Nepal Stock Exchange (NEPSE), two instruments dominate the secondary capital-raising landscape: the rights issue and the Further Public Offering, or FPO. Both mechanisms dilute existing ownership, and both carry consequences that are almost never fully appreciated by the retail shareholders who participate in them — or, worse, who ignore them entirely.

This chapter provides a complete analytical framework for understanding these two instruments. We will examine the arithmetic of dilution and pricing with the precision such decisions require, build a decision framework for the subscribe-or-renounce choice, understand the regulatory architecture that governs FPOs in Nepal, and finally confront an uncomfortable but essential truth: the compulsive use of rights issues by Nepali promoters constitutes one of the most systematic, yet least discussed, forms of minority shareholder harm in the market.

Lesson 15.1 — Why Rights Issues Are the Primary Capital-Raising Tool for NEPSE Companies

To understand why rights issues dominate Nepali corporate finance, one must first appreciate the institutional and regulatory environment from which they have emerged. Nepal's capital market is relatively shallow. The bond market remains underdeveloped, institutional investors are few, and access to long-term bank credit is both expensive and collateral-intensive. When a company needs growth capital — whether to expand its branch network, fund new infrastructure, or meet regulatory minimum paid-up capital requirements — the rights issue to existing shareholders is, in most cases, the path of least resistance.

A rights issue is a mechanism through which a listed company invites its existing shareholders to subscribe to new shares in proportion to their current holdings, typically at a price below the prevailing market price. The word 'rights' is precise: each shareholder receives a legally recognised entitlement to new shares, proportional to their existing stake. They are not obligated to exercise this right, but the right itself has intrinsic value — value that, as we shall see, is frequently misunderstood or abandoned by retail investors.

The Regulatory Mandate and the Minimum Paid-Up Capital Problem

Perhaps the single most powerful driver of rights issues in Nepal is regulatory compulsion. Nepal Rastra Bank (NRB), the central bank, has over the past decade issued a series of directives requiring commercial banks and financial institutions to maintain progressively higher levels of paid-up capital. What began as a requirement of Rs. 2 billion for Class A commercial banks has been increased multiple times, compelling banks that could not meet the threshold through retained earnings alone to turn to their shareholders for fresh capital — repeatedly, and in large amounts.

This regulatory escalation produced a peculiar dynamic: investors who had bought bank shares believing they were acquiring a stable, income-generating asset found themselves, year after year, being asked to pump additional capital into the same institution simply to keep regulators satisfied. The capital was not necessarily being deployed into higher returns — in many cases, it was diluting returns on equity precisely because the denominator (equity) was growing faster than the numerator (profits). The regulatory logic was sound from a systemic stability perspective; the consequence for individual shareholders was often silently punishing.

Beyond banks, development banks (Class B) and finance companies (Class C) faced similar trajectories. Hydropower companies, having secured project licences, have historically used rights issues to fund construction phases — a more defensible use of the instrument, though one that introduces its own timeline and execution risks.

Why Promoters Prefer Rights Issues Over Other Routes

From the promoter's perspective, a rights issue has several structural advantages over alternative capital-raising mechanisms. A private placement to new strategic investors would dilute existing promoter control. A public offering to entirely new shareholders would invite scrutiny, require more extensive regulatory compliance, and potentially introduce activist or institutional voices into the shareholder register. A rights issue, by contrast, is offered first to existing shareholders — including the promoters themselves — who, if they have the financial means, can maintain their ownership percentage simply by subscribing in full.

There is also a cost advantage. Rights issues in Nepal carry lower underwriting costs than public offerings, face less stringent disclosure requirements in some respects, and move through the regulatory pipeline more efficiently. The Securities Board of Nepal (SEBON) has built a rights issue approval framework that, while carrying its own procedural requirements, is broadly familiar to corporate secretaries and legal advisors across the listed universe.

The Shareholder Who Does Nothing

Understanding rights issues as the primary capital-raising tool requires confronting an asymmetry that is rarely discussed in Nepali investor education: the passive shareholder is systematically harmed. When a company issues new shares at a rights price, the total value of the company does not instantly increase by the amount of new capital raised — at least, not in the immediate term. Instead, existing shares decrease in market value because the same total company is now divided among more shares. A shareholder who does nothing — who neither subscribes to the rights issue nor sells their rights entitlement — ends up holding the same number of shares, but those shares are now worth less. They have been diluted.

This is not a theoretical concern. In Nepal's predominantly retail investor market, where a substantial share of the shareholder base consists of small investors who hold shares in demat accounts but lack either the financial capacity or the awareness to act on rights issues, the compounding effect of multiple rounds of dilution without corresponding participation can meaningfully erode wealth over years. The investor who bought 100 shares in a commercial bank in 2015, has been through five rights issues since, and has not subscribed to a single one, likely holds shares that represent a substantially smaller claim on the bank's equity than they once did — even if the nominal number of shares is unchanged.

This is the foundational problem that the rest of this chapter will address: the mechanics and the decisions involved, approached with the analytical rigour that the stakes demand.

Lesson 15.2 — Rights Ratio, Rights Price, and Theoretical Ex-Rights Price (TERP)

The arithmetic of a rights issue is not complicated, but it is frequently misunderstood — with real financial consequences. Getting comfortable with three numbers — the rights ratio, the rights price, and the Theoretical Ex-Rights Price — is the analytical foundation upon which every rights issue decision should rest.

The Rights Ratio: How Many New Shares for How Many Old

The rights ratio expresses the entitlement offered to existing shareholders. A 1:5 rights issue, for example, means that for every five shares currently held, the shareholder is entitled to subscribe to one new share. A 1:1 rights issue — sometimes called a 'one-for-one' or a 100% rights issue — means the company is doubling its share count, with each existing shareholder entitled to one new share for each they already hold.

In Nepal, rights ratios have historically been aggressive by international standards. Ratios of 1:1 (100%), 1:2 (50%), and even 2:1 (200%) are not uncommon, particularly in the banking sector during capital enhancement drives. A 1:1 ratio is a significant event: it doubles the total paid-up capital of the company and, if fully subscribed, brings in an amount of fresh capital equal to the rights price multiplied by the entire existing share count.

The Rights Price: Discount as Incentive, Not as Gift

The rights price is the price at which new shares are offered to existing shareholders. It is almost always set below the prevailing market price — this discount is the incentive for shareholders to subscribe. In Nepal, rights prices are frequently set at par value (Rs. 100 per share), regardless of how high the market price may be. This has an important implication: the lower the rights price relative to market price, the greater the value of the rights entitlement itself, and the steeper the post-issue dilution in the market price.

A rights price set at par for a company whose shares trade at Rs. 800 is a very different economic event from a rights price set at Rs. 600 for a company whose shares trade at Rs. 800. In the first case, the rights entitlement carries enormous intrinsic value; in the second, it carries moderate value. Both dilute the share price post-issue, but the magnitude differs significantly.

The Theoretical Ex-Rights Price: The Adjusted Value After the Issue

The Theoretical Ex-Rights Price, universally abbreviated as TERP, answers a deceptively simple question: if a rights issue is fully subscribed, what should the market price of the share be immediately after the issue? TERP is not a prediction — markets do not always behave efficiently, and the actual trading price will diverge from TERP based on sentiment, liquidity, and news flow. But TERP is the rational anchor around which ex-rights pricing should cluster, and any investor making a rights issue decision should calculate it.

The formula is:

TERP = (N x Market Price + R x Rights Price) / (N + R)

Where N is the number of existing shares, R is the number of new rights shares, and the market price is the prevailing price immediately before the ex-rights date. Let us work through a concrete example.

A Worked Example

Imagine a commercial bank — call it Himalayan Bank — with the following characteristics: 100 million shares outstanding, a current market price of Rs. 400 per share, and a proposed 1:2 rights issue (one new share for every two held) at a rights price of Rs. 100 per share.

Using our formula: N = 100 million (existing shares), R = 50 million (new shares, at 1:2 ratio), Market Price = Rs. 400, Rights Price = Rs. 100.

TERP = (100 x 400 + 50 x 100) / (100 + 50) = (40,000 + 5,000) / 150 = 45,000 / 150 = Rs. 300

The TERP is Rs. 300. This means that if you held one share worth Rs. 400 before the rights issue, the combined value of your one old share plus your entitlement to half a new share (the 1:2 ratio means two old shares entitle you to one new share) should approximate Rs. 300 per share after the issue. Your stake in the company — if you subscribe — remains proportionally unchanged. If you do not subscribe and simply hold, your share is now worth approximately Rs. 300, not Rs. 400: you have been diluted.

The Value of the Rights Entitlement

This brings us to the value of the rights entitlement itself — the 'rights' that a shareholder can either exercise (subscribe) or sell (renounce). Theoretically, the value of the right to subscribe to one new share is:

Value of Right = (Market Price - Rights Price) / (N/R + 1) OR = Market Price - TERP

In our Himalayan Bank example, the value of the right to subscribe to one new share is Rs. 400 - Rs. 300 = Rs. 100 per existing share held. Or, expressed differently: since the 1:2 ratio means you need two shares to get one right, the right to subscribe to one new share is worth Rs. 200 in total rights value across two existing shares.

This is the number that matters enormously in practice. If a shareholder cannot afford to subscribe, they should sell their rights entitlement — doing nothing means forfeiting this value entirely. In Nepal, the NEPSE trading platform does permit rights trading through renunciation mechanisms during the specified window, though liquidity can be thin and not all rights issues see active secondary market trading in entitlements.

TERP and Price Discovery on NEPSE

In practice, NEPSE's ex-rights price adjustment mechanism means that on the ex-rights date, the reference price for the share is typically adjusted downward to approximate TERP. This prevents the appearance of an artificial price crash while still reflecting the economic dilution. However, the actual opening price on the ex-rights date may diverge — sometimes substantially — from TERP, depending on whether market participants are bullish or bearish on the company's fundamentals, the amount of capital being raised, and the broader market environment.

Investors who misread an ex-rights price drop as a buying opportunity — simply because "the price fell" — without understanding that the drop is mechanical and not informational are making a category error. The TERP is the new baseline from which any further price movement should be judged.

Lesson 15.3 — Subscribe, Renounce, or Sell: A Decision Framework

Every rights issue confronts the shareholder with three choices: subscribe in full, subscribe partially, renounce all or part of the entitlement (sell the rights), or do nothing. These are not merely financial choices — they reflect a comprehensive judgment about the company, its management, the deployment of capital, and the investor's own financial position. A disciplined framework for navigating this decision will serve investors across every rights issue they encounter throughout their investing lives.

The Four Questions Before You Decide

The decision to subscribe or renounce should flow from four questions, answered in sequence. Skipping any of them is a shortcut that costs money.

The first question is: Do I still want to own this company? A rights issue is an opportunity to re-examine your investment thesis. If the company has deteriorated since you first bought in — management has changed, the business model has weakened, competitive pressures have intensified — a rights issue is the moment to ask whether you would buy this stock at TERP if you had no existing position. If the honest answer is no, the rights issue does not change that calculus. In that case, you should renounce your entitlement at the best available price and consider whether your existing holding still makes sense.

The second question is: Will this capital be productively deployed? The purpose of the capital raise matters enormously. There is a vast difference between a hydropower company raising rights capital to fund the construction of a profitable project with a signed Power Purchase Agreement, and a commercial bank raising rights capital for the seventh time in a decade primarily to satisfy regulatory minimums while its return on equity continues to decline. Capital raised to fund real economic value creation can produce returns that compensate for dilution. Capital raised to maintain regulatory compliance, or to fund acquisitions at inflated prices, or to expand into low-return segments, will likely deliver substandard returns on the incremental equity deployed.

The third question is: What is the post-rights valuation, and is it attractive? Using TERP as your base price, calculate the Price-to-Book and Price-to-Earnings ratios at which you would effectively be acquiring the new shares. If you are subscribing to a bank's rights issue at a rights price of Rs. 100 (par), you may be doing so at a time when the TERP represents a Price-to-Book of 2.5x — meaning you are paying a significant premium over book value for shares in a business whose return on equity might not justify that multiple. The act of subscribing is equivalent to making a fresh investment decision; price it accordingly.

The fourth question is: Do I have the capital to subscribe without compromising my overall portfolio? Rights issues create a liquidity demand that is frequently underestimated by retail investors, particularly when they hold shares in multiple companies and several rights issues coincide — a common occurrence in Nepal's periodic waves of capital enhancement drives. Borrowing to subscribe is almost never warranted unless the rights issue presents an exceptionally clear arbitrage opportunity; leveraging to participate in dilutive capital raises compounds risk in a way that retail investors are rarely equipped to manage.

The Maths of Partial Subscription

If financial constraints prevent full subscription, a partial subscription — subscribing to some but not all of your entitlement — is a rational middle path, provided you sell the unexercised portion. Many Nepali investors subscribe to the maximum they can afford and then forget to renounce the balance, forfeiting the value of the unexercised rights. This is avoidable: calculate your full entitlement, determine how many new shares you can afford at the rights price, subscribe to that number, and actively seek to sell the remaining entitlement during the specified renunciation window.

The Renunciation Window and Market Liquidity

SEBON regulations specify a rights issue subscription and renunciation period, typically lasting several weeks. During this window, shareholders who wish to sell their entitlements can do so through NEPSE's secondary market mechanism for rights, where a market exists. In liquid rights issues — particularly those of large commercial banks with broad shareholder bases — there is generally a secondary market for rights entitlements, and the traded price should approximate the theoretical value we calculated earlier. In illiquid rights issues, particularly for smaller companies or niche sectors, the secondary market may be thin, and shareholders may be forced to accept prices below theoretical value or may be unable to sell at all.

The practical implication is that the subscribe-or-renounce decision should be made early in the subscription window, before potential price deterioration in the rights trading market narrows the renunciation value.

A Note on Oversubscription

In some rights issues, particularly where the rights price represents a steep discount to market price, demand for new shares exceeds the entitlement allocated. In these situations, shareholders can apply for additional shares beyond their entitlement — a process called applying for the 'renounced portion' or 'additional application.' Whether to apply for additional shares requires an even more careful analysis than the base subscription decision, because you are effectively making a fresh investment at the rights price — with the additional variable that allotment is not guaranteed and is typically made by lottery among excess applicants.

Applying for additional shares when the rights price is substantially below TERP can be a profitable strategy, but only if (a) the investment thesis supports further ownership at that valuation, and (b) the investor has the financial capacity to absorb the allocation without distorting their portfolio balance.

Lesson 15.4 — FPOs in Nepal: Rules, Pricing, and When Companies Use Them

The Further Public Offering — colloquially known as the FPO — is a less common but equally important secondary capital-raising mechanism in Nepal. Unlike a rights issue, which is offered exclusively to existing shareholders, an FPO is offered to the general public, including institutional investors and the broader retail market. It is, in essence, a second Initial Public Offering: the same company that once listed its shares for the first time through an IPO returns to the public market to raise additional capital.

The Regulatory Framework Governing FPOs

FPOs in Nepal are governed principally by the Securities Registration and Issuance Regulation, 2073 (2016) issued by SEBON, along with subsequent amendments and directives. Under this framework, a company must meet specific eligibility criteria before it can undertake an FPO. Among the key requirements: the company must have been listed on a securities exchange for a minimum period, must have distributed dividends or maintained adequate profitability metrics, and must have completed any pending rights issues or conversions of previously issued securities.

The pricing mechanism for FPOs deserves particular attention. Unlike an IPO, where the price is set through the book-building process (for institutional tranches) or at par (historically, for retail tranches), FPOs in Nepal have been subject to a pricing formula that takes into account the company's earnings per share, book value per share, and sometimes a market premium. SEBON has moved toward allowing greater pricing flexibility, including book-building style price discovery for certain categories of FPO issuers. However, the regulatory framework continues to evolve, and the specific pricing methodology can vary by issuer type — commercial banks, development banks, insurance companies, and others may be subject to different rules.

Why Companies Choose FPOs Over Rights Issues

Given that rights issues are simpler and faster, why would a company choose an FPO? The answer lies in the objectives of the capital raise and the composition of the desired shareholder base. A company that wants to broaden its ownership base — reducing promoter concentration, admitting institutional shareholders, increasing free float, or improving market visibility and analyst coverage — will find an FPO more suitable than a rights issue. An FPO, by inviting public participation, can significantly diversify the shareholder register in a way that a rights issue, which tends to preserve the existing ownership structure, cannot.

There is also a signalling dimension. An FPO requires a prospectus, audited financials, and a level of public disclosure that — whatever its imperfections in practice — subjects management to greater scrutiny than a rights issue. Companies confident in their financials and business outlook may actively prefer the transparency signal an FPO sends; companies with more complicated financial stories may prefer the quieter rights issue route.

A third consideration is the role of promoter dilution. Promoters whose holdings are above regulatory ceilings — a situation that has arisen in various listed companies following changes in SEBON's maximum promoter shareholding guidelines — may be required to reduce their stakes. An FPO offered to the public effectively achieves this reduction without the promoters having to sell their shares in the open market (which could be disruptive and price-depressing). Instead, new shares are issued to the public, diluting the promoter percentage without a single promoter share changing hands.

FPO Pricing: What the Investor Must Evaluate

The critical question for an investor evaluating an FPO is whether the offered price represents a fair value relative to the company's intrinsic worth and the prevailing market price of the existing shares. This sounds simple, but it requires disentangling several layers.

First, the FPO price is typically set at or below the prevailing market price — if the FPO were priced above market, rational investors would simply buy on the exchange rather than subscribe to the FPO. The discount, if any, represents an immediate gain for FPO subscribers, but this must be weighed against the allotment probability (in oversubscribed FPOs, which are common, individual allotments may be very small) and the post-listing price trajectory.

Second, the investor must independently assess whether the market price itself is justified. An FPO from a company trading at an unjustifiably high market price — perhaps inflated by promotional commentary or speculative interest — is not automatically attractive simply because the FPO price is set below that inflated level. The correct reference point is intrinsic value: what is this business worth, based on its sustainable earnings, asset quality, growth prospects, and competitive position?

Third, the use of FPO proceeds must be scrutinised in the prospectus. FPO prospectuses in Nepal are required to disclose the objects of the issue — how the company intends to use the capital raised. The quality of this disclosure varies, and investors should read it with a sceptical eye. Vague statements about 'business expansion' or 'working capital requirements' are less informative than specific, quantified capital allocation plans with identifiable return profiles.

Post-FPO Price Behaviour: Patterns on NEPSE

Historically, FPOs on NEPSE have tended to list at premiums above the FPO price, particularly in bullish market phases, generating immediate gains for successful applicants. However, this pattern is neither universal nor persistent: companies that raise capital in excess of their productive deployment capacity, or that have issued FPOs during market peaks, have seen post-listing prices converge toward or below FPO price over the following months and years. The 'FPO listing premium' is a market phenomenon, not an economic guarantee, and it should not be the basis for subscription decisions. The correct basis remains the fundamental relationship between FPO price and intrinsic value.

Lesson 15.5 — The Equity Dilution Problem: Why Frequent Rights Issues Hurt Minority Shareholders

"Repeated rights issues that are not matched by proportionate growth in earnings are a form of silent taxation on minority shareholders — one that compounds invisibly and damages wealth with no single moment of visible harm."

The final lesson of this chapter addresses what is perhaps the most important and least understood structural risk in Nepal's equity market: the harm done to minority shareholders by the compulsive, frequent issuance of rights shares in the absence of commensurate earnings growth. This is not a peripheral concern. For investors who have held NEPSE-listed banking stocks over the past fifteen years, the dilution problem has been the single largest headwind to wealth creation — more damaging in many cases than market cycles, more persistent than any individual piece of bad news, and almost completely invisible to those who do not know where to look.

Return on Equity: The Number That Tells the Story

The central diagnostic for evaluating the impact of repeated rights issues is Return on Equity, or ROE — net profit divided by shareholders' equity. ROE is the measure of what the company earns, proportionally, on the capital shareholders have entrusted to it. If a company consistently earns Rs. 100 on every Rs. 1,000 of equity, its ROE is 10%. When a rights issue adds another Rs. 500 to the equity base, the company must now earn Rs. 150 in total net profit just to maintain that 10% ROE. If it cannot — if it earns Rs. 115, Rs. 120, perhaps Rs. 130 — ROE falls. Earnings per share falls. And unless the market blindly re-rates the stock upward on other grounds, the price falls too, or at best stagnates.

This is precisely what has happened in Nepal's commercial banking sector. Paid-up capital of the sector has grown dramatically over the past decade, driven by successive rounds of rights issues responding to NRB directives. Net profits have grown, but not proportionally. The result: sector-wide ROE has declined from the high teens or low twenties seen in the early 2010s to single digits or low double digits by the early 2020s. Shareholders who bought bank stocks at high Price-to-Book multiples, justified at the time by high ROEs, have watched the fundamental justification for those multiples erode — not because the banks became worse institutions in an absolute sense, but because the denominator of the ROE calculation grew faster than the numerator, mechanically and systematically.

Book Value Growth Without EPS Growth: The Trap

A common refrain from company managements and market commentators in Nepal goes as follows: 'Our book value per share is growing; the company is becoming stronger.' This statement is technically true but economically misleading. Book value per share grows when retained earnings are added to equity. But when rights issues continuously add capital at or near par value to the equity base — while earnings grow more slowly — book value per share can grow while simultaneously EPS stagnates or declines. The investor who bought shares at 3x book value for a 15% ROE business now holds shares at 3x a higher book value, but the ROE has fallen to 10%, making the 3x multiple unjustifiable. This is book value growth that destroys wealth.

The correct framing: what matters is not whether book value per share is higher than last year, but whether the company is earning an adequate return on that growing equity base. Growth in capital without adequate returns is not strength; it is dilution wearing the costume of prosperity.

The Promoter's Perspective vs. The Minority Shareholder's Reality

There is a deep conflict of interest at the heart of Nepal's rights issue culture that investors must understand. Promoters who control large blocks of shares and participate in every rights issue — or who obtain fresh shares through bonus issues and then face rights calls — can afford the continuous capital deployment. Their ownership percentage is maintained; their control is preserved; and in some cases, the additional capital, even if deployed at modest returns, increases the absolute scale of the business in ways that benefit promoters through management fees, related party contracts, and other perquisites of control.

Minority shareholders, however, face a different calculation. The retail investor who cannot participate in every rights issue either faces dilution of their economic claim or is forced to keep allocating fresh capital to the same company year after year — capital that might earn better returns elsewhere. The option to exit — sell the shares — is theoretically available but practically impaired by the fact that repeated rights issues suppress the share price, often making exit at acceptable prices difficult precisely when the shareholder is most exhausted by the capital demands.

This is not an abstract critique of any individual company or promoter group. It is a structural feature of markets where regulatory capital requirements, weak earnings power, and governance norms around minority shareholder protection combine to create a capital allocation pattern that systematically favours those with the means and information to participate over those without.

Screening for the Dilution Problem Before You Invest

The practical implication for investors is to build dilution history into pre-investment analysis. Before buying shares in any NEPSE-listed company — particularly banks, insurance companies, or capital-intensive businesses — examine the company's rights issue history over the preceding five to ten years. Calculate the growth in paid-up capital over that period, and compare it to the growth in net profit. If paid-up capital has grown at, say, 20% per year compounded while net profit has grown at 12%, the dilution math has been working against shareholders throughout.

Look at the trend in ROE: is it stable, rising, or declining? Look at the trend in EPS: is the company earning more per share today than five years ago, despite all the capital injections? A company that has grown its paid-up capital dramatically but whose EPS is flat or lower than it was five years ago is a company that has been consuming, not creating, shareholder value — regardless of what its nominal stock price or dividend payout might suggest.

When Rights Issues Are Value-Creating

It would be unfair and misleading to characterise all rights issues as destructive. Capital-intensive businesses at specific stages of their development — a hydropower project under construction, a bank expanding into underserved markets with genuinely high loan demand, an infrastructure company deploying capital into productive assets — can create substantial shareholder value through rights issues, provided the incremental capital earns a return that exceeds the cost of equity. The framework for evaluating any specific rights issue is precisely the TERP arithmetic and the business analysis discussed in earlier lessons of this chapter.

The warning is not against rights issues per se but against the pattern of reflexive, repeated rights issuance as a solution to every capital requirement, executed regardless of the company's capacity to deploy that capital productively. The discipline an investor must bring to rights issue decisions is the same discipline a sound capital allocator brings to every deployment of capital: is this the best available use of this money, at this price, in this company?