Case Study 5 — A Rights Issue Decision

First published 26 Aug 2026 · Last verified 29 Aug 2026

Case Study 5 — A Rights Issue Decision

Suman Gurung teaches mathematics at a secondary school in Damak, in Jhapa district, in Nepal's eastern tarai. He is not a big investor by Kathmandu standards. His demat account holds shares in eleven companies, most bought in small lots over eight years, funded by his teaching salary and by the occasional remittance his younger brother sends home from Doha. One evening in Shrawan 2080 (July 2023), he opened his Mero Share account — the online portal most Nepali investors use to see their share holdings and apply for new issues — and found a new line waiting for him: an entitlement to buy new shares of Api Power Company Limited, a hydropower company he had held for three years.

This chapter follows Suman through that decision, using the same tools this book has built since Chapter 15. It is a true story in its bones — the company, the ratio, the price, and the dates are all real and can be checked against Api Power's own disclosures and NEPSE's public records. Suman's personal numbers — his exact holding, his cash position, his family's finances — are illustrative, built to teach the math cleanly. But the corporate action itself, and the arithmetic it forces on every shareholder who receives it, is not invented. It happened, in the middle of 2023, to tens of thousands of real Api Power shareholders across Nepal.

Lesson 87.1 — Meet the Investor and the Notice

A rights issue is an offer a company makes to its own existing shareholders, giving them the first chance to buy new shares before anyone else gets the opportunity. Chapter 15 introduced this idea with a simple analogy: think of a company as a pie, and shareholders as people who each own a slice. When the company issues new shares, the pie gets cut into more slices. A rights issue is the company's way of saying, "before we let new people buy slices, you — the people who already own a piece of this pie — get the first right to buy more, at a price we are fixing today, in proportion to what you already hold." That is where the word "rights" comes from: it is a right, not an obligation. You can use it, use part of it, hand it to someone else, or ignore it. What you cannot do is stop the company from issuing the new shares altogether — that decision belongs to the company's board and its shareholders' general meeting, not to any one individual shareholder.

Api Power Company Limited, traded on NEPSE under the symbol API, is a hydropower company — one of the many firms that build and operate small and mid-sized hydroelectric plants across Nepal's rivers and sell the electricity they generate to the Nepal Electricity Authority (NEA) under long-term power purchase agreements. Hydropower is arguably the single most important growth sector in the Nepali capital market, tracking Nepal's chronic need for more electricity generation, its abundant river gradient, and the political ambition — repeated in budget speech after budget speech — of exporting surplus power to India and Bangladesh. By 2023, Api Power was already an established operator, and it was in the middle of building a new plant, the Upper Chameliya hydroelectric project, rated at 40 megawatts.

Building a hydropower plant is expensive, and almost none of that expense is paid up front by shareholders in one go. Companies borrow heavily from Nepali banks during construction, then repay as the plant starts earning revenue. But bank borrowing in Nepal is not always cheap, and it is never limitless — Nepal Rastra Bank (NRB), the central bank, sets rules on how much of their deposits banks can lend out, and when liquidity in the banking system tightens, as it did sharply in 2022 and into 2023, lending rates for companies like Api Power can climb into the mid-teens. A company sitting on expensive project debt has two ways to lighten that load: earn more, or borrow less. A rights issue is one of the standard ways Nepali companies choose the second path — raising equity from their own shareholders and using part of the proceeds to pay down loans, cutting the interest bill for good.

That is the backdrop Suman was reading into, without necessarily using those words, when the entitlement notice appeared in his Mero Share account. The number in front of him was simple enough: for every 10 shares he held, he was entitled to buy 4 new ones. But a plain-English number is not a decision. Chapter 78 built a playbook precisely for this moment, and this chapter is where we walk that playbook against a real filing instead of a hypothetical one.

Lesson 87.2 — Reading the Fine Print

Before any decision can be made well, the facts have to be assembled in one place. This is the least glamorous step in the entire rights-issue playbook, and it is also the one investors skip most often — scrolling past the notice, noting only "oh, rights shares," and moving on without ever reading the numbers that actually determine whether participating makes sense.

Api Power's rights issue, once assembled from the company's own disclosures and NEPSE's listing notices, looked like this.

A few of these lines need unpacking, because each one carries a decision-relevant fact, not just a piece of trivia.

The book closure date is the single most important date on the whole notice, and Chapter 15 already explained why: it is the cut-off day the company uses to freeze its shareholder register and decide who counts as an "existing shareholder" for this offer. If you owned Api Power shares on that date (in practice, you needed to have bought and had the trade settle by Ashad 21, one day before closure), you received the entitlement. Buy the shares even one trading day after book closure, and you get nothing from this particular rights issue, even though you now own the stock. This is exactly the kind of detail that trips up investors who buy a stock because they heard "rights are coming" without checking whether they are still in time to qualify.

The subscription window is the period during which entitled shareholders must actually act — submit their application, and pay for the shares they want, either through their bank via the C-ASBA system (Centralised Applications Supported by Blocked Amount, where your bank temporarily locks the required cash in your account rather than transferring it immediately) or, increasingly, directly through the Mero Share portal. Miss this window entirely, and your entitlement is treated exactly like a "no" — it lapses.

The issue price of Rs 100 deserves its own callout, because it is one of the most consistent and most criticised features of the Nepali market.

Finally, the stated use of proceeds matters more than most investors give it credit for. Api Power's own disclosures pointed to loan repayment as the primary use of the roughly Rs 1.65 arba raised. That is not automatically a red flag — a company under construction, carrying project debt at double-digit interest rates during a tight-liquidity year, can meaningfully strengthen its balance sheet by swapping expensive debt for equity. But it is also not the same story as "we are raising fresh capital to build an entirely new plant we could not otherwise afford." Chapter 78's playbook asks you to separate these two motives clearly, because they carry different implications for how soon the money translates into higher future earnings.

Lesson 87.3 — The Four Doors: Exercise, Partial, Renounce, Lapse

Chapter 78 laid out four doors that stand in front of every shareholder who receives a rights entitlement. Walking through Api Power's real notice is the clearest way to show what each door actually costs and delivers.

The first door is full exercise: apply for every share you are entitled to, and pay for all of it. For Suman, holding 500 Api Power shares, a 10:4 ratio entitled him to 200 new shares at Rs 100 each — a cash outlay of Rs 20,000. Full exercise preserves his percentage ownership of the company exactly as it was before the issue; if he owned 0.001 percent of Api Power before, he owns 0.001 percent after, because his share count grew by the same 40 percent that the total share count grew by.

The second door is partial exercise: apply for some of the shares, but not all — say, 100 of his 200 entitled shares, paying Rs 10,000. This preserves some but not all of his proportional ownership. It is the door investors use most often when the arithmetic clearly favours subscribing but the household budget genuinely cannot stretch to the full amount that month — a common and entirely reasonable position for a schoolteacher with a fixed monthly salary and a fixed subscription deadline that does not care whether that month also brought a large medical bill or a dashain expense.

The third door is renunciation: transferring your entitlement to someone else, who then applies and pays in your place.

For Suman, the practical version of renunciation was much simpler than finding a stranger to negotiate with: he could transfer his entitlement to his wife, who held her own demat account and had more free cash that month from a small inheritance. Renouncing within a family does not create or destroy any household wealth by itself — the shares simply end up registered under a different name inside the same family's holdings — but it is a legitimate way to route a cash call toward whichever household member actually has the liquidity, without leaving money on the table.

The fourth door is doing nothing at all, and letting the entitlement lapse. This is the door that costs the most and is chosen the most casually, usually by investors who simply forget the deadline, cannot raise the cash, or have lost confidence in the company.

Api Power's own numbers show this playing out at scale: of the 16,533,137 rights shares on offer, 1,194,934 units were not subscribed for by existing shareholders and went to a public auction in early October 2023. Every one of those unsubscribed shares represented a shareholder — or several thousand of them — who let real, quantifiable value slip away, usually without ever calculating what it was worth.

Lesson 87.4 — Hemisphere 1: Liquidity, Governance, and Durability

This book's Canon Score exists to keep an investor from making decisions on vibes — sector excitement, a friend's tip, or a headline about hydropower's bright future. Chapter 64 defines it precisely: seven dimensions, not five, summing to exactly 100 points — Financial Strength & Profitability (20), Governance & Promoter Behaviour (15), Liquidity & Tradability (10), Valuation Reasonableness (15), Sector & Business Model Durability (15), Growth Trajectory (15), and Dividend & Capital Return Discipline (10). A total of 85 or above is Exceptional, 70 to 84 is Strong, 55 to 69 is Adequate, and below 55 is Weak/Avoid — with one override rule attached: if the Governance & Promoter Behaviour sub-score falls below 5 out of 15, the whole score is automatically capped in the Weak/Avoid band, no matter what the arithmetic sum says. As Chapter 84's hydropower case study showed, Chapter 65's sector adjustments apply directly here — a signed power purchase agreement, seasonal revenue reading, and the liquidity lens Chapter 58 built around circuit-trap exit risk.

Chapter 78 added one instruction specific to corporate actions like a rights issue: check the Canon Score both before and after, because a capital raise can genuinely move a company's score, for better or worse. But it is worth being precise about which of the seven dimensions a rights issue can actually move. A rights issue offered pro-rata — the same 10:4 ratio to every shareholder — does not change who controls the company, does not touch its power purchase agreement or its regulatory license, and does not, by itself, make the stock easier or harder to trade on NEPSE. Liquidity & Tradability, Governance & Promoter Behaviour, and Sector & Business Model Durability are the three dimensions least affected by a rights issue in the near term, so this lesson scores them once, using the most recent verifiable figures, and treats them as essentially the same before and after the 2023 issue. Lesson 87.5 turns to the dimensions a rights issue genuinely can move.

Liquidity & Tradability (10 points). Api Power trades with real, checkable depth: a 30-day average volume of roughly 128,561 shares a day at a recent price near Rs 327 works out to well over Rs 40 million of rupee turnover a day, comfortably inside Chapter 64's top band for average daily traded value. Public shareholding sits at 42 percent, with the remaining 58 percent held by promoters — a real, disclosed split, and one that clears Chapter 64's 40-percent free-float threshold for full marks. Volume: 5 out of 5. Free float: 5 out of 5. Liquidity & Tradability: 10 out of 10.

Governance & Promoter Behaviour (15 points). Promoter shareholding stability and pledging (6 points): a stable 58 percent promoter block, with no pledging disclosed in the sources checked for this chapter, though a verified CDSC pledging record was not independently confirmed — scored 5 out of 6. Related-party transactions and audit opinion (5 points): no specific related-party red flag surfaced in Api Power's disclosures or its credit-rating commentary, and the company's quarterly results have been published on a regular schedule — scored 4 out of 5. Disclosure timeliness and board independence (4 points): Api Power conducted its 20th annual general meeting on schedule in mid-January 2024, and its quarterly and annual results have continued on a predictable cadence since, including the fourth-quarter results for fiscal year 2081/82 published in mid-August 2025 — scored 4 out of 4. Governance & Promoter Behaviour: 5 + 4 + 4 = 13 out of 15.

Sector & Business Model Durability (15 points). The moat sub-component (8 points) is Chapter 64's own textbook full-marks case: a licensed hydropower generator selling under a long-term power purchase agreement to the Nepal Electricity Authority, which guarantees revenue once a plant is generating regardless of who else enters the sector — scored 8 out of 8. Revenue concentration and dependency risk (7 points) is where the same structural fact cuts the other way: like nearly every Nepali hydropower operator, Api Power sells effectively all of its output to one buyer, NEA. Chapter 64 flags this exact case as the one its generic concentration band was not built to answer cleanly, and Chapter 65's own cross-sector table marks the adjustment here as "Moderate" without supplying a specific numeric fix — the same acknowledged gap this book's Chapter 84 case study already named. Scored consistently with that precedent: 4 out of 7. Sector & Business Model Durability: 8 + 4 = 12 out of 15.

Hemisphere 1 total: Liquidity & Tradability 10 + Governance & Promoter Behaviour 13 + Sector & Business Model Durability 12 = 35 out of 40 — a genuinely strong foundation, and one that the rights issue itself neither earned nor put at risk.

Lesson 87.5 — Hemisphere 2: What a Rights Issue Actually Moves

The four remaining dimensions are where a capital raise can leave a real mark — and where Api Power's actual, disclosed numbers, both before and after the 2023 rights issue, tell a concrete story rather than an abstract one.

Financial Strength & Profitability, scored twice. Before the rights issue, in the fiscal year immediately preceding it, Api Power's own disclosed figures showed a debt-to-equity ratio of 1.37 and a return on equity that had collapsed to 0.16 percent, down from 7.05 percent three years earlier — a three-year ROE trend Chapter 64's own band language treats the same way it would treat a loss year. Return on equity (8 points): 1 out of 8, both before and after, because even today's much-improved figure has not yet cleared Chapter 64's 7 percent floor — more on that below. Leverage and interest-coverage discipline (7 points), pre-issue: a 1.37x debt-to-equity ratio, well above Chapter 64's 1.0x top-band threshold, in a year of unusually tight Nepali bank liquidity — scored 2 out of 7. Earnings quality and consistency (5 points), pre-issue: a sharply declining three-year ROE trend with no confirmed outright loss, but a genuinely erratic pattern — scored 2 out of 5. Pre-issue Financial Strength & Profitability: 1 + 2 + 2 = 5 out of 20.

After the rights issue, using the most recently disclosed figures, CARE Ratings Nepal's own credit-watch note reports the overall gearing ratio improved to 0.92 times as of the first half of fiscal year 2025/26, down from 1.00 times a year earlier, and interest coverage strengthened to 3.82 times from 2.30 times — both real, verified, and explicitly attributed by the rating agency to "the successful completion of the rights issuance." Leverage and interest-coverage discipline, post-issue: gearing now clears the 1.0x threshold, though interest coverage still falls short of Chapter 64's 5x top-band mark — scored 5 out of 7. Earnings quality and consistency, post-issue: fourth-quarter revenue for fiscal year 2024/25 grew 53.01 percent year-on-year, though net profit for that same quarter actually fell slightly, from Rs 456.58 million to Rs 427.66 million, as net margin compressed from 36.57 percent to 25.90 percent — real growth with a real, disclosed cost, and no outright loss year — scored 4 out of 5. Return on equity, post-issue: 6.49 percent, down from 8.01 percent the year before — a genuine improvement over the near-zero pre-issue figure, but Chapter 64's band language is explicit that anything under 7 percent sits in its bottom band, and the honest reading of the most recent verified year is that it still does — scored 1 out of 8, unchanged from the pre-issue score. Post-issue Financial Strength & Profitability: 1 + 5 + 4 = 10 out of 20.

Valuation Reasonableness (15 points), scored on today's verifiable numbers rather than 2023-vintage multiples this chapter could not independently confirm. Price-to-earnings (8 points): Api Power currently trades around 21.75 times trailing earnings against a hydropower-sector average near 18.37 times — a ratio of about 1.18, inside Chapter 64's 1.1x-to-1.5x band — scored 3 out of 8. Price-to-book (7 points): a current price-to-book ratio of about 2.74 times could not be checked against a verified hydropower-specific book-value median, so it is compared here to the broader NEPSE market's price-to-book average of roughly 2.8 times, a wider and less precise benchmark, disclosed as such — the resulting ratio of about 0.98 falls inside the 0.8x-to-1.1x band — scored 5 out of 7. Valuation Reasonableness: 3 + 5 = 8 out of 15.

Growth Trajectory (15 points). Revenue growth (8 points): the only confirmed year-on-year figure available, a 53.01 percent jump in fourth-quarter fiscal year 2024/25 revenue, is real and strong, but it is one quarter, not a verified trailing multi-year average, so it is scored conservatively rather than as if it represented a confirmed multi-year compound growth rate — scored 4 out of 8. Earnings consistency (7 points): quarterly earnings per share slipped from Rs 7.89 to Rs 7.04 year-on-year even as full-year earnings per share reached Rs 15.06, a mixed and only partially confirmed picture without a verified five-year series — scored 3 out of 7. Growth Trajectory: 4 + 3 = 7 out of 15.

Dividend & Capital Return Discipline (10 points). Consistency of payout (6 points): Api Power has distributed a dividend — bonus shares, cash, or both — in nearly every year since starting commercial operations in 2072/73, averaging roughly 7.14 percent in bonus shares annually with a high of 10.5 percent, but its cash dividend has stayed thin throughout, running from about 0.26 to 0.55 percent in recent years, well under Chapter 64's 30-to-70-percent payout-ratio ideal — a real, near-unbroken record, but at a persistently low cash payout ratio — scored 4 out of 6. Sustainability of payout (4 points): the company is now consistently profitable and cash-generative post-commissioning, and nothing in its disclosures suggests dividends are being funded by drawing down capital — scored 4 out of 4. Dividend & Capital Return Discipline: 4 + 4 = 8 out of 10.

Lesson 87.6 — The Full Worked Canon Score

Assembled using exactly the seven dimensions and point weights Chapter 64 defines, and scored on the most recently verifiable figures for the four dimensions a rights issue can actually move:

Summed, Api Power's Canon Score comes to 68 out of 100 — inside Chapter 64's Adequate band, near its upper edge. The governance override does not apply: Governance & Promoter Behaviour scored 13 out of 15, comfortably above the 5-point floor that would otherwise cap the whole score in Weak/Avoid regardless of the arithmetic sum.

This is a materially different number from the original, informal "around 70" this chapter once used — not because Api Power's underlying business changed, but because a five-category, 20-points-each scheme that never existed in Chapter 64 has been replaced with the real seven-dimension framework, applied with the same discipline this book has used on every other case study in this Part. The overall picture the real score tells is close in spirit to the original's rough instinct — a decent, self-funding hydropower operator that a rights issue genuinely strengthened — but it is more precise about exactly where that strength sits (a strong Hemisphere 1: 35 out of 40) and exactly where real uncertainty remains (Valuation and Growth, both built partly on data this chapter could not fully verify, and a Financial Strength score still held down by a return on equity that has not yet cleared Chapter 64's own bar).

Lesson 87.7 — The Tax Math Nobody Reads Until It's Too Late

Chapter 37 covered the tax treatment of rights and bonus shares in detail, and two of its rules matter enormously here, because they change the real, after-tax value of each of the four doors.

The first rule is about cost basis — the number the tax office treats as what you "paid" for a share, used later to calculate your taxable gain when you sell. When you exercise a rights entitlement, your cost basis for those new shares is the issue price you actually paid, not the market price the shares happened to be worth on the day you received them. For Api Power, that meant a cost basis of Rs 100 per new share, regardless of how much higher the stock was trading. Since almost the entire market value of a deeply discounted rights share sits above that Rs 100 cost basis, nearly all of it becomes taxable capital gain whenever the shares are eventually sold.

The second rule is about the holding period clock, which determines whether a sale qualifies for the lower long-term capital gains rate or the higher short-term one. As this book's tax chapters have set out, individual resident investors in Nepal pay a lower rate — commonly cited at 5 percent — on gains from shares held more than 365 days, and a higher rate — commonly cited at 7.5 percent — on shares held 365 days or less. For newly issued rights shares, that 365-day clock starts running from the date the new shares are allotted and listed, not from whenever the parent shares were originally bought. A shareholder who has held the underlying stock for a decade still starts a brand-new holding-period clock for every batch of rights shares they take up.

Putting the corporate-action math and the tax math together side by side makes the four doors easier to compare directly. Using illustrative numbers close to Api Power's actual position — a cum-rights market price of roughly Rs 350 in the weeks before book closure, and the real ratio and issue price from the notice — the theoretical ex-rights price, the price the stock should mathematically settle at once the new shares are absorbed into the market, works out to a little under Rs 280. That is a useful benchmark, because it lets an investor calculate the entitlement's true value: roughly Rs 178 of embedded value on every new share bought at Rs 100, or equivalently around Rs 71 of value attached to every existing share held, whether or not that shareholder chooses to act on it.

Reading this table plainly: doing nothing does not mean standing still financially. It means actively forfeiting roughly the same amount of value that full exercise would have captured — value that instead flows to whoever wins the unsubscribed shares at auction, and to the company itself, which collects any auction premium above Rs 100. The only door that costs zero value while still keeping every rupee inside the same household is renunciation to a family member with spare cash — which is precisely why Suman, after running these numbers, seriously weighed asking his wife to take up a portion of the entitlement in her own name rather than simply skipping it.

Lesson 87.8 — The Decision and What Happened Next

Suman's actual decision, once the Canon Score and the tax and dilution math were laid out side by side, was to fully exercise his entitlement — but to fund it deliberately rather than by scraping together whatever cash was lying around. A Canon Score of 68, near the top of Chapter 64's Adequate band and anchored by a genuinely strong Hemisphere 1, told him Api Power was a company worth continuing to own and worth defending his position in, but not one worth stretching for — the same "good enough to defend, not good enough to load up on" verdict the original rough estimate pointed toward, now resting on seven real, individually checkable numbers instead of five invented ones. So rather than dipping into the emergency fund this book's earlier chapters insist on keeping untouched, he sold a small, long-underperforming holding in a finance company whose own Canon Score had drifted down toward the Weak/Avoid band over the preceding year — freeing up almost exactly the Rs 20,000 his 200-share entitlement required, without disturbing either his emergency fund or his family's other financial commitments. This is the "cash-neutral rights strategy" Chapter 78 recommends whenever an investor's overall Canon Score checklist flags a weaker holding elsewhere in the same portfolio: fund a good rights issue by exiting a weaker position, rather than by adding fresh financial stress.

He applied through the C-ASBA system at his local bank branch in Damak during the second week of the subscription window, which ran from Shrawan 31 to Bhadra 19, 2080 BS — mid-August to early September 2023 in the standard calendar. He did not renounce any portion to his wife in the end; once he had confirmed the sale proceeds from the finance-company shares would clear his bank account before the subscription deadline, funding the full entitlement himself was simpler than arranging a formal transfer, and it kept his own percentage ownership of Api Power exactly where it had been.

Not every Api Power shareholder made the same call. Real market data shows that 1,194,934 of the 16,533,137 rights shares on offer — a little over 7 percent — went unclaimed by existing shareholders and were sold at a public auction held from October 4 to 11, 2023. Some of those shareholders no doubt made a considered decision that the company's Canon Score, or their own cash position, argued against participating. Many more, in all likelihood, simply missed the deadline, misplaced the notice, or never ran the numbers at all — forfeiting real value to auction bidders for no better reason than inattention.

Looking back from several years later, the credit-and-cash-flow logic behind Api Power's 2023 rights issue held up reasonably well. By the 2081/82 fiscal year, the company was declaring both a bonus share distribution and a cash dividend to shareholders — a sign of a business that had moved past its heaviest construction financing needs and into a more normal, profit-distributing phase. None of that outcome was guaranteed back in 2023; it was simply the direction the Canon Score's growth-outlook and financial-health categories had pointed toward, and it is the kind of multi-year follow-through that separates a rights-issue decision made on a clear framework from one made on a coin flip.

The broader lesson of Suman's story is not "always subscribe to rights issues" or "hydropower is always a good bet." It is that a rights issue notice is not paperwork to be glanced at and filed away — it is a live financial decision with a real cash amount, a real deadline, a real tax consequence, and a real cost to inaction, and every one of those elements can be read directly off the company's own disclosure if an investor takes the time to assemble them, exactly as Table 1 in this chapter did. The four doors — exercise, partial exercise, renounce, lapse — are always open during a subscription window. Only one of them, chosen deliberately and for a clear reason, is the right one for any given investor's actual circumstances; the other three are not wrong by definition, but walking through the wrong door by default, simply because the notice sat unread in an inbox, is the single most common and most avoidable mistake this book has catalogued.