Nil-Paid Shares

Nil-paid shares, often called nil-paid rights, are provisional rights-issue entitlements that trade before the holder pays the subscription price for the new shares. A buyer of the nil-paid entitlement must still pay the subscription amount by the deadline to receive the fully paid share.

They are not free fully issued shares and are not a general term for any deferred-payment security. In UK usage, the FCA describes a rights issue as using a renounceable document that may trade as nil-paid rights before payment is due.

Key Takeaways

• Nil-paid rights represent an entitlement, not a fully paid share.
• The market price of the right is separate from the subscription price payable to the company.
• A holder can generally exercise, sell, or transfer the right during the permitted period.
• Rights can expire worthless if instructions and payment are not completed on time.
• Prices are market-driven and can deviate from theoretical value.

Worked Example

Use a 1-for-4 rights issue where the existing share trades cum-rights at $12 and the subscription price is $8. The theoretical ex-rights price is:

One nil-paid entitlement buys one new share for $8. Its theoretical value is:

A holder with 400 existing shares receives 100 nil-paid entitlements:

• Cash required to exercise all rights: 100 x $8 = $800
• Theoretical value of all nil-paid entitlements: 100 x $3.20 = $320
• Total theoretical investment after exercise: existing shares plus $800 of new cash, with market values adjusting around the ex-rights event

If a buyer pays $3.00 for one nil-paid right and then pays the $8 subscription price, the total cash cost is $11.00 before fees and taxes. That should be compared with the current price of the fully paid share and the remaining execution risk, not only the $8 subscription price.

Why the Formula Is Only Theoretical

TERP assumes the only value change is the new shares and subscription cash. Actual prices reflect changing company value, market movements, supply and demand, transaction costs, time to expiration, and uncertainty about completion.

The earlier shortcut “market price minus exercise price” is incomplete unless the market price is the comparable ex-rights or fully paid share price and one right corresponds to one new share. Ratios and quotation conventions must be checked.

Trading and Exercise Lifecycle

1. Existing shares trade cum-rights until the applicable date.
2. Eligible holders receive provisional nil-paid entitlements.
3. Nil-paid rights may trade separately during a limited window.
4. Buyers and original holders decide whether to exercise or sell.
5. Payment and valid instructions must reach the subscription agent by the deadline.
6. Exercised rights convert into fully paid shares; unexercised rights are handled under the offering terms.

How to Evaluate Nil-Paid Rights

• Confirm how many rights are needed for one new share.
• Add the right purchase price, subscription payment, brokerage, taxes, and other fees.
• Compare total cost with the fully paid share price.
• Check the last trading date separately from the exercise deadline.
• Review settlement timing, currency, fractions, and excluded-holder rules.
• Understand whether lapsed rights are sold for the holder’s benefit or expire without compensation.

Risks and Common Mistakes

Nil-paid rights are short-lived and can be volatile. A decline in the fully paid share below the subscription price can sharply reduce the right’s value. Operational delays or missed deadlines can cause a total loss of the entitlement value.

Do not assume that receiving nil-paid rights requires no eventual cash, that trading remains liquid, or that theoretical value is guaranteed. Tax treatment of receipt, sale, exercise, lapse, and resulting shares varies by jurisdiction.

This page is educational and is not investment, legal, operational, or tax advice.

Related Terms

• Rights Issue: The proportional share offer that creates the entitlements.
• Stock Rights: Subscription rights to buy shares under stated terms.
• Fully Paid Share: A share for which the required issue amount has been paid.
• Subscription Price: The amount paid to exercise the right and acquire the new share.
• Unsubscribed Shares: Offered shares not taken up through basic subscriptions.

FAQs