Rights Issue – Example

Assume company XYZ has announced rights issue in the ratio

of 5:2 (for every 5 shares additional 2 shares are offered).
If you hold 100 shares of XYZ, then, (100 * 2/5) = 40
You will be entitled to get 40 new shares of XYZ.
The new shares are usually given at deep discount price so that
the full issue gets subscribed and the company may raise the
required capital. A future date is fixed for this corporate action. 
After this corporate action the share price comes down
proportionate to the issue ratio, theoretically.  Actual value differs
from this theoretical value based on the intention of the funds’
raise.
Consider,
Share price of XYZ is Rs300 and the company is offering new
shares at Rs200 and you hold 100 shares of XYZ.
You can buy 40 shares at Rs200.
The amount required to buy new shares is (40*200) = Rs8000.
Value of the existing shares is (300 * 100) = Rs30000
Total value of 140 shares = (30,000 + 8000) = Rs38000
Theoretical share price ex-rights = (38,000 / 140) = Rs271.5
In case of rights issue you have the below options to choose.
1. No action at all. It’s not recommended since it dilutes
the value of your existing shares. I.e. in the above
example you would leave with (100 * 271.5) = Rs27150
(whereas the original value was Rs30000).

2. Opt to buy all the shares you are entitled to by paying

Rs8000. As explained above. You will have 140 shares
with a theoretical price of 271.5
You can buy a part of the shares you are entitled to.

3. Opt to sell the shares to other investors or the

underwriter in which case theatrically you would get
Rs10860 (271.5 * 40) and
You need to pay Rs8000 (40 * 200).
Capital gain is the difference (10860-8000) which is
Rs2860.

Of course there will be capital loss on your existing 100

shares to compensate this.

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