Renunciation of rights
A shareholder's choice to transfer their rights-issue entitlement to someone else, for payment or as a gift, instead of subscribing to the new shares themselves.
In plain language
A rights issue gives existing shareholders first refusal on new shares, but it does not force them to buy. A shareholder who does not want to subscribe has options beyond simply letting the entitlement lapse.
One of those options is renunciation — passing the entitlement on to someone else, who can then subscribe in the original shareholder's place.
How it works
The workbook: shareholders "may buy shares offered to them under rights issue or let the choice expire without any action or may choose to transfer their rights/entitlement to another person for consideration (sell) or without consideration (under love and affection). This is called renunciation of rights." Chapter 9.3 sets this out as 1 of 3 choices open to a shareholder once a rights issue is announced. Rights entitlements also trade on the stock exchange for a defined period, so this transfer does not have to be a private, one-off arrangement.
A worked example
Using the workbook's own rights-issue example: shareholder A holds 10 shares of a company trading at Rs 100, and the company announces a 1-for-2 rights issue at Rs 70 — entitling A to 5 new shares.
If A renounces this entitlement instead of subscribing, A can sell the right to buy those 5 shares to another investor — say, for roughly Rs 30 per share of entitlement, the rough gap between the Rs 100 market price and the Rs 70 subscription price. A collects 5 × Rs 30 = Rs 150 for the entitlement, while the buyer separately pays the company 5 × Rs 70 = Rs 350 to actually receive the shares.
Why NISM asks about it
Chapter 9.3 (Rights Issue) defines renunciation immediately after explaining the rights-issue mechanics with this exact 1-for-2, Rs 70 example. Expect a question on the difference between subscribing, letting an entitlement lapse, and renouncing it.
Common exam traps
- Renunciation can be for payment or as a gift — the workbook names both "for consideration (sell)" and "without consideration (under love and affection)." Do not assume it always involves a sale.
- Letting an entitlement lapse is a third, separate choice, distinct from both subscribing and renouncing — a shareholder who does nothing simply forfeits the entitlement.
Where this is taught
Free preparation for NISM Series XVRelated terms
- BuybackA company purchasing its own shares out of reserves and extinguishing them, reducing share capital and raising earnings per share for the shareholders who remain.
- Scheme of arrangementA court-monitored settlement, under Section 230 of the Companies Act 2013, between a company and its creditors or shareholders — covering everything from debt restructuring to mergers.
- Share swapExchanging one company's shares for another's at an agreed ratio, typically used to pay for a merger or acquisition with stock instead of cash.
- Spin-offA corporate action where a company carves out one of its existing businesses into a separate, newly listed company, giving existing shareholders shares in the new entity too.
- Rights issueAn offer of new shares at a set price to existing shareholders in a fixed ratio to what they already hold, so that their proportionate stake is not diluted when the company raises fresh capital.