ACCA Advanced Taxation (ATX) Practice Exam

What defines a sale of rights nil paid in the context of a rights issue?

1. A refusal to participate in the rights issue

2. Not subscribing for additional shares and selling the rights instead

3. Transferring existing shares to another party

4. Buying additional rights from other shareholders

The correct answer is: Not subscribing for additional shares and selling the rights instead

In the context of a rights issue, a sale of rights nil paid specifically refers to the act of not subscribing for additional shares but instead opting to sell the rights to those shares that are offered in the rights issue. This occurs when shareholders receive an opportunity to purchase additional shares at a discounted price, but instead of making the purchase, they choose to sell their rights to another investor who may be interested in acquiring those shares. This action typically happens when shareholders decide that they do not want to increase their investment in the company or if they wish to gain some cash without further investment. The term "nil paid" indicates that the rights are sold without any payment required from the seller, as the seller is essentially transferring rights that they have been offered due to their existing shareholding. The other choices do not accurately reflect the definition of a sale of rights nil paid. Refusing to participate in the rights issue does not involve a transaction, transferring existing shares refers to a different process altogether, and purchasing additional rights involves a different dynamic. Therefore, the option correctly captures the essence of the transaction associated with rights issues in a corporate finance context.