Investment Accounting (right entitlement)

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Subhrajit Chakraborty (Querist)

21 November 2022 1.🔸 A company offered right entitlement of 3 for 5 held on that date at a premium of rupees 2 per share.

2.🔸 A company offered right entitlement at 3 for 5 held on that date at a premium of rupees 2 per share.

In terms of meaning, what is the difference between these two sentences?

Suppose if I have 10,000 shares then,

🔸(when I check my accountancy book) as per the 1st sentence, I would receive 10,000×1/5 =2,000 rights, why it's 1/5 and not 3/5? but as per the 2nd sentence, it would be 10,000×3/5=6,000

Please help 😅

Aashok Kumar Sharma online

Aashok Kumar Sharma

(Expert)

09 July 2024 The difference between the two sentences lies in the interpretation of the "3 for 5" entitlement ratio.

1. **First Sentence:** "A company offered right entitlement of 3 for 5 held on that date at a premium of rupees 2 per share."

- This sentence indicates that for every 5 shares you currently hold, you are entitled to purchase 3 additional shares at a premium of Rs. 2 per share.
- So, if you have 10,000 shares, you calculate the rights entitlement as follows:
\[
\text{Rights entitlement} = \frac{10,000 \times 3}{5} = 6,000 \text{ rights}
\]

2. **Second Sentence:** "A company offered right entitlement at 3 for 5 held on that date at a premium of rupees 2 per share."

- This sentence also conveys the same entitlement ratio of 3 for 5, meaning for every 5 shares you hold, you can purchase 3 additional shares.
- Therefore, with 10,000 shares, the calculation remains the same:
\[
\text{Rights entitlement} = \frac{10,000 \times 3}{5} = 6,000 \text{ rights}
\]

### Why 3/5 in Calculation?

When you see "3 for 5" entitlement ratio, it means:

- For every 5 shares you currently hold, you have the right to buy 3 additional shares.
- The ratio "3 for 5" is typically interpreted as a fraction where the numerator (3) represents the number of rights shares you can buy, and the denominator (5) represents the number of shares you currently hold to qualify for those rights.

### Clarification on Calculation:

The confusion seems to arise from the interpretation of "3 for 5." In both sentences, the calculation for rights entitlement is correct:

- If you have 10,000 shares and the entitlement is "3 for 5," you calculate it as:
\[
\text{Rights entitlement} = \frac{10,000 \times 3}{5} = 6,000 \text{ rights}
\]

This means for every 5 shares you hold, you are entitled to 3 additional shares. Hence, with 10,000 shares, you get 6,000 rights.

Therefore, based on both sentences provided, the rights entitlement calculation should indeed be:
\[ \frac{\text{Number of shares held} \times 3}{5} \]

This formula applies universally to both sentences and aligns with the standard interpretation of "3 for 5" rights entitlement.

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