What Are Renounceable Rights?
Renounceable rights are rights to purchase a set number of shares in a company at a discounted price, offered to existing shareholders when a company wants to raise more capital. The practice of offering shares at a special price to people who hold stock in a company is known as a rights issue, and is done to provide people with an opportunity to maintain their proportional ownership in the company. In the case of renounceable rights, the rights are transferable and people can choose to sell them if they do not want to exercise them.
When a company offers renounceable rights, it evaluates the number of shares people already hold and the current price for shares on the open market. It offers a proportional amount of shares in the new issue at a lower price. Shareholders who choose to take advantage of the offer are able to buy shares to compensate for the dilution that occurs when new shares are issued. They can also opt to sell the renounceable rights if they do not want to exercise them, or choose to pass altogether, even though the value of their existing shares will be diluted because the overall number of shares in the company is going up.
There are markets for renounceable rights and people can usually find buyers. For members of the trading public, buying such rights can be advantageous as it allows them to access a new issue before other members of the public, at a lower price than the company's shares trade for on the open market. Value of such rights varies, depending on a number of factors, from the total discount offered to the company's current financial position. When purchasing the rights, people weigh the cost of the purchase of the right itself along with the stock.
A related concept is the non-renounceable right. In this case, the company offers a chance to buy a particular number of shares at a discount, but it is not transferable. If the stockholders pass up on the opportunity, the rights cannot be sold to a third party. When companies prepare for a rights offering, they consider which kind of rights they want to offer and issue information about the planned offering to allow people time to prepare.
Announcements about current and planned offerings are made available in a number of locations. Company websites typically feature overviews and it is also possible to get information from financial publications and financial news organizations.
