Rights-Issue TERP Adjustment

A rights issue can create an apparent price drop even when an eligible holder receives something valuable: the right to buy new shares at a stated subscription price. A clean history needs to represent that transfer without inventing a market price.

This tutorial gives you an auditable calculation. You will build TERP, value the right in two different units, handle currencies and event revisions, and test the result against a real issuer-documented event.

Start with the distinction that prevents most errors

Theoretical ex-rights price, or TERP, is a reference calculation. It combines an old-share price reference with the cash paid for new shares. It is not a prediction of the opening trade, and it is not evidence that any share changed hands at that number.

Keep these three layers separate:

1. Sourced facts: offer ratio, subscription price, currencies, issuer dates, reference-price source, revisions.
2. Methodology choices: which price and time to use, whether to remove a dividend disadvantage, which FX observation and out-of-money policy apply.
3. Derived values: TERP, implied rights values, adjustment factor, and fractional entitlement.

Observed ex-rights trades form a fourth layer. They need market data and are outside this algorithm.

Read the entitlement basis literally

"7 new shares for every 24 existing shares" means:

• $n=24$ existing shares;
• $m=7$ new shares;
• each existing share carries $m/n=7/24$ of an entitlement to one new share.

Do not invert that ratio. Do not call $P-TERP$ "the value of one right" unless you specify that it is value per old share. The right to acquire one whole new share has a different value.

Put prices on one basis

Let $P_{raw}$ be the selected cum-rights market reference and $D$ a cash or dividend disadvantage removed by the chosen methodology:

$$P=P_{raw}-D$$

Let $S$ be the subscription price, $X$ the number of quote-currency units per subscription-currency unit, and $F$ and $T$ any explicitly included fee and tax per new share:

$$C=SX+F+T$$

If both prices are in pence, keep both in pence. If one says GBP and the other says GBp, convert the scale before calculation. For different currencies, store the FX source and the time it became available. A later FX fixing cannot enter an earlier decision.

Calculate TERP and both rights values

For an in-the-money issue where $C<P$:

$$TERP=\frac{nP+mC}{n+m}$$

The value theoretically removed from one old share is:

$$V_{old}=P-TERP=\frac{m(P-C)}{n+m}$$

The value of the entitlement to buy one new share is:

$$V_{right}=TERP-C=\frac{n(P-C)}{n+m}$$

These agree after scaling: $V_{old}=(m/n)V_{right}$. The analytical backward-adjustment factor is $A=TERP/P$.

A real event: National Grid's 2024 rights issue

National Grid's 23 May 2024 prospectus states the following facts:

• 7 new shares for every 24 existing shares;
• subscription price of 645 pence per new share;
• entitlement record time of 18:00 London time on 20 May;
• existing shares ex-rights and nil-paid dealings starting at 08:00 on 24 May;
• final acceptance, payment, and registration-of-renunciation deadline at 11:00 on 10 June;
• fully paid new-share dealings starting at 08:00 on 12 June.

The issuer also identified a 1,127.5 GBp closing middle-market price on 22 May and a 39.12 GBp final dividend not payable on the new shares. Under the declared dividend-adjusted reference convention:

$$P=1127.5-39.12=1088.38\ \text{GBp}$$

Now derive TERP:

$$TERP=\frac{24(1088.38)+7(645)}{31}=988.261935\ \text{GBp}$$

That gives:

• $V_{old}=100.118065$ GBp per old share;
• $V_{right}=343.261935$ GBp per right to acquire one new share;
• $A=0.908012$;
• issue-price discount to TERP of 34.7339%.

The last number reconciles to National Grid's rounded 34.7% statement. It still does not tell us what National Grid traded at on 24 May.

Event dates are different clocks

National Grid's record date preceded the announcement. That is not permission to use the terms before publication. A point-in-time system stores both the event's legal/market time and the time the evidence became available to the system.

The package knows the prospectus publication day but does not invent a publication second. Its historical fixture uses 23:59:59Z as a conservative end-of-day availability convention and labels that as an engineering policy.

Revisions matter too. A later corrected ratio or cancellation must create a new revision. The implementation selects the latest availableAt <= asOf; if nothing was available, it stops.

Renunciation, nil-paid rights, and oversubscription

A nil-paid right is an entitlement before the subscription price has been paid. When rights are renounceable, that entitlement can be transferred or sold subject to the offer, venue, broker, and jurisdiction rules. Its traded price can differ from $V_{right}$.

Oversubscription is another operation: a holder asks for more than the base entitlement, and an allocation policy decides what they receive. It does not change $n$, $m$, or TERP. The National Grid teaching extract does not establish an oversubscription facility, so the data says "not documented" instead of assuming yes or no.

Fractional entitlements also belong to the legal terms. For 100 old shares, the exact entitlement is:

$$100\left(\frac{7}{24}\right)=29.166667$$

The calculator reports 29 whole shares plus a 0.166667 fraction. National Grid's prospectus says entitlements were rounded down and fractions generally aggregated for the company's benefit. Another offer can have another policy.

Fees, taxes, and issuer expenses

National Grid estimated issuer expenses but also stated that the company charged investors no commissions, fees, or expenses in connection with the rights issue. Those are different quantities. Do not allocate issuer expenses into a shareholder TERP formula unless the chosen methodology explicitly says to do so.

Taxes depend on holder and jurisdiction. The calculator supports explicit per-new-share amounts only when a documented analytical convention requires them. Zero means "not included in this calculation," not "the investor has no tax cost."

Reject plausible-looking nonsense

If $C \ge P$, the algebra produces a zero or negative rights value. Many production methodologies make no price adjustment; others delay treatment. The reference implementation requires the caller to choose:

• reject: stop and request the correct methodology;
• no_adjustment: return $TERP=P$ and zero rights value, with applied=false.

It never publishes a negative right value.

The implementation also rejects zero or fractional offer bases, a cash disadvantage that removes the entire reference price, same-currency FX other than one, future FX evidence, timeline inversions, cancellation, and missing source revisions.

Implement it causally

The Python and TypeScript versions follow the same sequence:

1. select the knowable revision;
2. validate the timeline and terms;
3. normalize price, cash, currency, and FX;
4. apply the out-of-money policy;
5. calculate without intermediate rounding;
6. emit revision identifiers and six-decimal diagnostics.

The shared tests cover 16 cases in each language, including cross-currency conversion, future FX, fractional entitlement, cancellation, out-of-money handling, and input immutability.

Explore the reference convention

Open the guided TERP lab. Step through evidence, normalization, calculation, rights values, and the operational timeline. Then compare a cross-currency case and an out-of-money rejection. Reset is deterministic, and the lab's historical values match the shared fixture.

What this result can and cannot prove

Passing the tests proves that the implementation matches its declared convention for covered cases. It does not prove that a specific index provider, broker, tax authority, or data vendor would use the same price, FX, timeline, rounding, or event treatment. It also does not prove an observed ex-rights price or an investment outcome.

Summary

TERP is valuable because it makes an adjustment explainable, not because it predicts a trade. Preserve the old/new basis, source price and timing, currency and FX, issuer timeline, revision history, and policy choices. Calculate both rights-value units. Keep allocation and legal terms beside the arithmetic, and stop when evidence is not knowable.

Continue with Spin-Off Price Adjustment. For earnings comparability, see Rights-Issue Bonus-Factor Adjustment.

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Primary source roles and limitations are in REFERENCES.md. This is educational material, not investment, legal, accounting, or tax advice.