Non-Renounceable Rights: What They Are and How They Work
Overview
A non-renounceable rights issue is an offer from a company giving existing shareholders the opportunity to buy additional shares—typically at a discount—proportionate to their current holdings. These rights are non-transferable: shareholders cannot sell them on the market and must either exercise them within the offered period or let them lapse.
How it works
- The company offers new shares to existing shareholders at a specified subscription price and ratio (for example, 1 new share for every 4 held).
- Shareholders who wish to maintain their proportional ownership pay the subscription price and receive the allocated new shares.
- Shareholders who do not exercise the rights lose the chance to buy at the discounted price; their ownership is diluted when the new shares are issued.
Comparison with renounceable rights
- Renounceable rights: transferable and tradable on the market. Shareholders who don’t want or can’t afford the new shares can sell their rights to someone else.
- Non-renounceable rights: not transferable. The only options are to exercise the rights (buy the new shares) or let them lapse.
Why companies use non-renounceable rights
- Speed and certainty: they create a narrow window to raise capital quickly to meet urgent funding needs (e.g., acquisitions, expansion, debt repayment, or avoiding insolvency).
- Control: the company limits the secondary market for the rights and simplifies the capital-raising process.
- Existing shareholders get a prioritized chance to maintain their stake, although inability to fund the purchase may still lead to dilution.
Impact on shareholders
- Dilution: issuing new shares increases total outstanding shares, reducing the percentage ownership of shareholders who do not participate.
- Compensated value: the discounted subscription price partly offsets dilution for those who exercise their rights.
- Opportunity cost: because the rights aren’t tradable, shareholders lacking funds during the offering can’t monetize the right and may see the value of their holdings decline.
Simple example
Imagine you own 100 shares of a company that issues a non-renounceable right of 1 new share for every 4 held at a discount:
* You’re entitled to buy 25 new shares at the subscription price to keep the same ownership percentage.
* If you don’t buy them, your stake will be diluted once those shares are issued.
Key takeaways
- Non-renounceable rights let existing shareholders buy additional shares at a discount but cannot be sold.
- They are often used when a company needs to raise capital quickly and wants to offer existing shareholders the first opportunity to participate.
- Shareholders who can’t or don’t exercise the rights face dilution and cannot recover value by selling the rights.