Renouncement of right

When a company makes a rights issue, existing shareholders get the right to subscribe for new shares. A shareholder who does not want to exercise that right does not have to let it lapse — they can renounce it, usually for a price, in favour of someone else.

Because that right has a market value, giving it up for a price is itself a taxable event, and the workbook fixes exactly how it is taxed.

Two rules from Table 8.4 of the workbook govern renouncement:

Cost of acquisition: Nil. The right being renounced cost the shareholder nothing to acquire — it was simply an entitlement that arose from already holding shares — so its cost of acquisition for capital gains purposes is treated as nil.

Period of holding. The period of holding is reckoned from the date of the offer made by the company to subscribe to the shares or other security, to the date of renouncement. This is usually a short window, since a rights offer typically stays open for only a few weeks.

Because the cost of acquisition is nil, the entire amount received for renouncing the right becomes the capital gain — there is nothing to net it against.

Illustrative figures. ABC Ltd. makes a rights offer on 1 June, and Mrs Talwar, an existing shareholder, is entitled to subscribe for additional shares. She decides not to subscribe and instead renounces her right in favour of another investor for Rs 15,000 on 20 June.

Sale consideration (amount received for renouncing)   Rs 15,000
Less: Cost of acquisition                              Nil
Capital gain                                            Rs 15,000
Period of holding: 1 June to 20 June — a matter of weeks, so short-term

The full Rs 15,000 is her taxable gain, taxed at whatever rate applies to a short-term gain on the underlying security — because the right cost her nothing to acquire, there is no cost figure to reduce the gain.

Chapter 8 (Capital Gains), Table 8.3 (period of holding) and Table 8.4 (cost of acquisition), both list renouncement of right to subscribe to shares. Expect a computation question where the cost of acquisition column is the trap — candidates who assume some notional cost understate the taxable gain.

• Cost of acquisition is Nil, not "the value of the right" or "market value on offer date." The entire sale proceeds become the gain.
• The period of holding runs from the company's offer date, not from when the original shares were bought. This is a fresh, usually short, holding period specific to the right itself.
• Renouncing a right is different from letting it lapse. Renouncement is a transfer for consideration and triggers capital gains; simply not subscribing and letting the offer close is not the same transaction.
• This is a different rule from bonus shares, where cost of acquisition is also nil for post-2001 issues, but the period of holding runs from the date of allotment, not from an offer-to-renouncement window.