What are 'Non-Renounceable Rights'

Non-renounceable rights refer to an offer issued by a corporation to shareholders to purchase more shares of the corporation (usually at a discount). Unlike a renounceable right, a non-renounceable right is not transferable, and therefore cannot be bought or sold.

BREAKING DOWN 'Non-Renounceable Rights'

Issuing more shares dilutes the value of outstanding stock. But because the rights issue allows the existing shareholders to buy the newly issued stock at a discount, they are compensated for the impending share dilution. The compensation the rights issue gives them is equivalent to the cost of share dilution. However, shareholders who do not take exercise the rights by buying the discounted stock will lose money as their existing holdings will suffer from the dilution.

Why Companies Offer Non-Renounceable Rights

By offering non-renounceable rights, the company is setting a narrow window of opportunity for the shareholders to potentially purchase more stock at discount. Offering such rights can be seen as more favorable to the company than to existing shareholders, even though a discount may be offered. If the shareholders do not have sufficient funds at the time the non-renounceable rights come into play to exercise said rights, they stand to lose the opportunity to purchase the shares at the discount rate. Regardless of what action the existing shareholders take, the company will proceed with issuing more stock, which could service the capital needs of the business.

A company might offer non-renounceable rights on shares if there are a set timeframe and capital objective the business needs to meet. This could be to gather enough funds to make an acquisition of another company, to expand its operations through mass hiring and the establishing of new locations, pay back debts, make new purchases of other assets, or to reorient its financial roadmap for long-term needs. The company could be facing bankruptcy if it does not address its capital circumstances.

If the company is under constraints to raise more capital in order to maintain its prospects as a going concern, it might be necessary to issue shares regardless of the potential dilution effect it could have on existing shareholders. Non-renounceable rights are a way for the company to give existing shareholders the chance to maintain their stake in the business while controlling the leeway available to them to take advantage of the discounts. For shareholders, this can be seen as a less than desirable option than being offered rights they could conceivably sell on the market and see returns for themselves.

  1. Open Offer

    An open offer is a secondary market offering, similar to a rights ...
  2. Subscription Right

    A subscription right is the right of existing shareholders in ...
  3. Nil-Paid

    Nil-paid is a security that is tradeable but that originally ...
  4. Majority Shareholder

    A majority shareholder is a person or entity that owns and controls ...
  5. Diluted Normalized Earnings Per ...

    Diluted Normalized Earnings Per Share measures a company's earnings ...
  6. Fully Diluted Shares

    Fully diluted shares is the total number of shares that would ...
Related Articles
  1. Investing

    Know your shareholder rights

    Common-stock owners have numerous privileges and should be vigilant in monitoring a company. Read on to learn what rights you have as a shareholder.
  2. Investing

    Stock Rights Issue

    Rights are offers that allow existing stockholders to buy additional shares at a predetermined price, for a set time period. Usually, the number of shares the investor can purchase are in proportion ...
  3. Investing

    Investing in Stock Rights and Warrants

    Learn why many companies choose to issue rights or warrants as an alternative means of generating capital and how their value is determined.
  4. Investing

    Assess Shareholder Wealth With EPS

    Find out if management is doing its job of creating profit for investors.
  5. Investing

    What Are Corporate Actions?

    Be a savvy investor - learn how corporate actions affect you as a shareholder.
  6. Investing

    Why Do Companies Care About Their Stock Prices?

    A company's stock price reflects the company's earnings potential, its future viability, determines management compensation can play a critical role in mergers and acquisitions.
  7. Small Business

    Governance Pays

    Learn about how the way a company keeps its management in check can affect the bottom line.
  8. Small Business

    Whom Should Corporations Please?

    Companies balance the interests of owners, customers and employees. Find out who comes out on top.
  9. Investing

    How to pick winning penny stocks

    When choosing penny stocks, wise investors note several key factors that affect the way these stocks trade – and the inherent risks that can follow.
  1. How does additional equity financing affect existing shareholders?

    Learn about how equity financing affects existing shareholders. By issuing and selling shares on the open market, equity ... Read Answer >>
  2. The share price and company's secondary offering

    When a company increases the number of shares issued through a secondary offering, it generally has a negative effect on ... Read Answer >>
  3. What is stock dilution?

    Stock dilution occurs when company actions reduce the ownership percentage of current shareholders. Find out how ownership ... Read Answer >>
  4. How Do Fully Diluted Shares Affect Earnings?

    Learn how fully diluted shares affect EPS calculations and perceived value. Read Answer >>
  5. What are the advantages of ordinary shares?

    Dividends and ownership rights are two advantages of investing in ordinary shares. Read Answer >>
  6. Why would I need to know how many outstanding shares the shareholders have?

    Find out why shareholders should know how many outstanding shares have been issued by a corporation, and learn what happens ... Read Answer >>
Trading Center