A rights issue offers existing shareholders the chance to buy new shares in proportion to what they already own, at a price below the market. The discount is the entire marketing case and it is entirely an illusion, which is why the arithmetic has to be automatic before the judgement can begin.
Take a company with 12.00 crore shares at ₹640 announcing three new shares for every eight held, at ₹400. The issue creates 4.50 crore new shares and brings ₹1,800 crore of cash into the company. After it, the same enterprise plus that cash is spread over 16.50 crore shares, so the theoretical ex-rights price is (12.00 × 640 + 4.50 × 400) ÷ 16.50 = ₹574.545455. The stock has not fallen. It has been divided differently.
The right to buy one new share at ₹400 when the share is worth ₹574.55 is worth ₹174.545455. Each existing share carries three-eighths of one such right, so the right attaching to one existing share is worth ₹65.454545, and that is exactly the drop from ₹640 to ₹574.55. The two routes have to agree, and if they do not, one of the share counts is wrong.
The headline discount is 37.50% against the cum-rights price. The real discount, against the price the shares will actually trade at once the issue is done, is 30.38%. Neither number is a reason to subscribe.
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How should a shareholder respond to a rights issue?
Now the decision, for a holder of 800 shares. Subscribing costs ₹1,20,000 for 300 new shares and leaves her with 1,100 shares worth ₹6,32,000, so her wealth is ₹5,12,000, exactly what she started with. Renouncing the entitlement at its fair value leaves her with 800 shares worth ₹4,59,636.36 plus ₹52,363.64 of sale proceeds, which is again ₹5,12,000. Doing nothing leaves her with ₹4,59,636.36 and a loss of ₹52,363.64.
Three routes, two of which are free and one of which is not. The rights issue is value-neutral to anyone who acts and expensive to everyone who does not.
That symmetry is where most teaching stops, and it is where the analysis starts. A rights issue is a primary-market fundraise, and the only question that matters to a long-term holder is what the ₹1,800 crore will earn. If the company's cost of equity is 13% and the new capital is deployed at 8%, the money is worth 1,800 × 0.08 ÷ 0.13 = ₹1,107.69 crore the moment it lands, and ₹692.31 crore of value has been destroyed. Spread over 16.50 crore shares that is ₹41.96 a share, or 7.30% of the ex-rights price, and it is a permanent loss that no amount of correct subscription arithmetic protects you from.
So there are two rights-issue decisions and they are independent. Do I act on the entitlement, which is arithmetic. And do I want more of this business at this price funding this use, which is analysis.