Feb 11, 2026 .

Right Renunciation in a Rights Issue: Legal & Tax Treatment

Riteek Baheti

Associate Member, Institute of Company Secretaries of India (ICSI) LL.B.

Proprietor, Riteek Baheti & Associates
(Kolkata-based Practicing Firm)

Registered Valuer, Insolvency and Bankruptcy Board of India (IBBI)
(Security or Financial Assets Valuation Specialist)

A rights issue is one of the most shareholder-friendly ways for a company to raise capital. It preserves ownership proportions while offering existing members the first opportunity to subscribe to new shares. However, not every shareholder wishes to invest additional funds at the time of issue. This is where the concept of right renunciation becomes relevant. While the idea appears simple, its legal validity and tax consequences require careful interpretation under both the Companies Act, 2013 and the Income-tax Act, 1961.

This article explains the right renunciation from a corporate law and tax standpoint, focusing on practical interpretation rather than theoretical repetition.

Concept of Right Renunciation

Right renunciation refers to the ability of an existing shareholder to transfer or surrender their entitlement under a rights issue in favour of another person. Instead of subscribing to the shares themselves, the shareholder allows a third party to apply for the shares on their behalf.

In substance, the shareholder is not transferring shares, but transferring a valuable entitlement attached to their existing shareholding.

Rights Issue Framework under the Companies Act, 2013. Statutory Basis

Section 62(1)(a) of the Companies Act, 2013, governs rights issues. It mandates that whenever a company proposes to increase its subscribed capital by issuing further shares, such shares must be offered to existing equity shareholders in proportion to their paid-up share capital.

Crucially, the Act allows shareholders to:

Accept the offer
Decline the offer
Renounce the offer in favour of another person, unless restricted by the Articles of Association.

Thus, renunciation is not an exception—it is a statutory right, subject to internal corporate governance documents.

Conditions for Valid Renunciation

For a renunciation to be legally valid:

Articles of Association
The Articles must not prohibit renunciation. If the Articles are silent, renunciation is permitted by default.
Offer Letter Disclosure
The letter of offer must clearly state that the rights are renounceable and specify the manner and timeline.
Time-bound Action
Renunciation must be exercised within the offer period. Any attempt after closure is invalid.
Board Oversight
The Board must approve allotment to renouncees, especially where the renouncee is not an existing shareholder.

Who Can Be a Renouncee?

There is no statutory restriction under the Companies Act on who can receive renounced rights. The renouncee may be:

An existing shareholder
A relative
A strategic investor
Any third party, including a non-resident (subject to FEMA compliance)

However, in private companies, care must be taken to ensure compliance with shareholder limits and contractual restrictions in shareholders’ agreements.

Accounting and Capital Structure Implications

From the company’s perspective:

Share capital increases only upon allotment.
Renunciation itself does not affect capital.
Premium, if any, is credited normally once shares are allotted.

From the shareholder’s perspective, the right to subscribe is treated as a capital asset, even though it is intangible and short-lived.

Income-tax Treatment of Right Renunciation

The tax impact differs for:

The renouncing shareholder
The renouncee who subscribes to shares

Tax Implications for the Renouncing Shareholder

Nature of Income

When a shareholder renounces rights for consideration, the amount received is treated as capital gains, not income from other sources.

The right entitlement is considered a capital asset under Section 2(14) of the Income-tax Act.

Cost of Acquisition

In most cases, the cost of acquisition of the right entitlement is nil, as the shareholder acquires the right automatically by virtue of holding shares.

Therefore:

Sale consideration = amount received for renunciation
Cost = nil
The entire amount is taxable as capital gains

Period of Holding

The period of holding starts from the date of the offer of rights to the date of renunciation. Since this period is usually short, gains are typically short-term capital gains.

Tax is charged at applicable slab rates (for individuals) or normal corporate tax rates.

Example

A shareholder renounces rights for ₹2,00,000.

Cost of acquisition: Nil

Taxable short-term capital gain: ₹2,00,000

Tax Implications for the Renouncee (Subscriber)

For the renouncee, the tax impact arises at two stages:

1. At the Time of Subscription

If the renouncee pays:

Issue price to the company, and
Renunciation consideration to the shareholder

There is no immediate tax incidence at the time of subscription, provided the transaction is at fair value.

However, Section 56(2)(x) may become relevant if shares are issued below fair market value, especially in closely held companies.

2. On Subsequent Sale of Shares

The cost of acquisition for the renouncee includes:

Amount paid to the company for shares, plus
Amount paid to acquire the renunciation right

The period of holding for capital gains begins from the date of allotment of shares, not from the date of renunciation.

This distinction is critical while determining whether gains are short-term or long-term.

Applicability of Section 56(2)(x)

In case of unlisted shares:

If shares are issued at a price lower than FMV
And the difference exceeds prescribed limits.

Then the difference may be taxable as income from other sources in the hands of the renouncee.

Proper valuation under Rule 11UA becomes essential in rights issues involving renunciation.

FEMA and Non-resident Considerations

If rights are renounced in favour of a non-resident:

Pricing guidelines under FEMA must be followed.
Valuation by a merchant banker or chartered accountant may be required.
Reporting under FC-GPR may be triggered post allotment.

Non-compliance can invalidate an otherwise lawful renunciation.

Practical and Advisory Considerations

Companies should clearly draft offer letters to avoid ambiguity on renunciation.
Shareholders should document the consideration received for tax substantiation.
Renouncees must maintain valuation records to defend Section 56 exposure.
Private companies should examine shareholder agreements before allowing renunciation.

From an advisory perspective, right renunciation is often used for:

Strategic stake consolidation
Group restructuring
Family shareholding realignment
Entry of new investors without public issuance

Conclusion

Right renunciation is more than a procedural option in a rights issue—it is a valuable economic right with legal and tax consequences. While the Companies Act provides the enabling framework, the Income-tax Act determines how value extracted from such rights is taxed.

For shareholders, renunciation converts an opportunity into taxable capital gains. For renouncees, it influences acquisition cost, valuation exposure, and future capital gains computation. When structured carefully and supported by proper documentation, right renunciation can be a legitimate and efficient capital planning tool rather than a compliance risk.

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