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What are non-renounceable rights?

non-renounceable rights

A non-renounceable rights issue is an offer issued by a company to stockholders to purchase more shares of the company at a discount. Unlike a renounceable rights issue, a non-renounceable rights issue cannot be sold or bought and is therefore non-transferable.

In this article, we will learn what non-renounceable rights mean and understand the difference between renounceable and non-renounceable rights.

Publicly-listed companies issue shares to the market in order to raise money to fund such things as expenses, debts, mergers and acquisitions, and capital expenditures. However, issuing more shares leads to the dilution of the outstanding stock value. 

Companies compensate for this dilution by offering right issues to shareholders to allow them to buy newly issued stock at discounted rates. The discount in newly issued shares is equivalent to the cost of share dilution. Shareholders who choose not to exercise their rights issue could end up losing money as the value of their existing holding gets diluted.

Renounceable vs non-renounceable rights

Renounceable rights are offers made to a company’s existing stockholders to buy shares in it at discounted rates. Shareholders can opt to renounce their privilege to the rights issue and trade their rights on the open market in a renounceable rights issue. 

Shareholders are not allowed to transfer their rights to new issues in a non-renounceable rights issue.

The options available to shareholders in the event of a renounceable rights issue are:

  • Exercise their right issue in full and purchase newly issued company shares.

  • Sell all or part of their rights in the open market.

  • Buy extra rights from the market.

Non-renounceable rights explained: Example

To understand the definition better, let's look at the non-renounceable rights example.

Company X wants to raise capital to fund acquisition of a smaller rival in order to expand its operations. Its shares currently trade at $100 each. The company offers each shareholder the right to buy one new share in X for every five shares they already own. The company offers new shares at a 30% discount or $70 per share.

Some important points to consider are: 

Firstly, the 1-for-5 right issue ratio mentioned above. Here the ratio of new shares to old shares is decided by the company. Shareholders who own less than five shares in X will not be able to participate in the right issue.

Secondly, the discount offered by the company on newly issued shares encourages existing shareholders to buy new shares, even though the issuance of extra shares is diluting the value of outstanding stock.

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