City & Business: It's time to support the CBI's capital plan

The new system of capital raising, proposed by the Confederation of British Industry, which would sit alongside the traditional underwritten rights issue, appears to answer all the questions that have perplexed City institutions as they have deliberated over this complex question. The only unanswered question is why is it not being wholeheartedly embraced as a matter of urgency?

Most significantly, the new system preserves pre-emption rights for existing investors. Pre-emption rights are regarded as sacrosanct and have proved a stumbling block for earlier attempts to reform the fund-raising process.

Not only does the new system keep them intact, but it also offers a host of other advantages. If adopted, it would certainly head off the threatened reference of the entire underwriting issue to the Monopolies and Mergers Commission. More importantly, it would inject a degree of flexibility into the capital-raising equation, which would provide a tremendous boost for the investment ambitions of British industry.

It is not so much that the cost of raising capital will fall (which it will), but rather that it will allow a much more focused approach to fund- raising by the corporate sector. The traditional underwritten rights issue has tended to carry a stigma akin to that of a negative dividend. It is rarely used as a source of long- term investment capital, because of the view that British institutions take about equity.

The fixation we have with dividends and accounting earnings rather than long-term capital appreciation has often made equity unappealing as a source of long-term investment finance.

That has surely provided an unnecessary constraint on our industrial base, which for the sake of the nation's prosperity must be liberated. The new system proposed by the CBI will allow the corporate sector to raise equity capital more cheaply, but will also impose a strict discipline by demanding clear articulation of why the funds are required.

In the face of such compelling arguments in favour of this evolutionary rather than revolutionary refinement of the capital-raising process, it is hard to establish why it has taken British institutional investors so long to accept that the change is for the better. Could it be that their real concern is that the breaking-up of a cosy cartel will deprive them of the extremely lucrative income stream that comes from underwriting commissions?

What has never been satisfactorily answered is who actually gets the sub-underwriting commission. How is it actually allocated among the funds managed by the institution that performs the underwriting?

Does the commission actually go to the funds owning the shares that attract the rights? Are they allocated pro-rata across every fund in the group? Or are they allocated to the weakest funds to boost their performance? Or perhaps they are salted away in the overall corporate coffers and not allocated to the funds at all.

Nobody really knows. What is clear, however, is that this prized source of income would be eroded significantly if a new system of equity raising were to be offered as an alternative to the underwritten rights issue.

Disappointing though this may be for the underwriters, they should not allow this to stand in the way of a long overdue reform.

Never mind the bung ...

Scottish Amicable has run into flak over its decision to demutualise and ultimately seek a stock market listing. Much of the criticism stems from the worrying "bung mentality" that governs the way we think of demutualisation.

The bung was first brought to us by the building societies and has subsequently been evident in the demutualisation of life insurers. This focus on the immediate hand-outs when judging a demutualisation represents a concentration on the short term that is entirely inappropriate for a long-term business such as life insurance. So crude an analysis might be slightly more relevant if all mutuals were the same, but they are not. In judging Scottish Amicable's demutualisation it is important to look at its decision in the context of its own policyholders, not those at the Norwich Union. If Scottish Amicable had the non-life business that Norwich Union is blessed with, it might have been able to consider issuing free shares of its own. It does not, so it is ploughing its own furrow.

The business needs strengthening and it needs a style of management more appropriate for a fast-changing and increasingly competitive market. The board has decided that a two-stage demutual- isation and subsequent float is the best way to build long-term value.

It would have been more valid to attack Scottish Amicable if it had continued to chug along as a cosy mutual. This proposal can only be judged by looking at the long-term implications not the short-term bung.

Wall Street touchdown

One man stands between Wall Street and the end of the great US bull market. His name is Drew Bledsoe. He is not a gifted stock market guru. He is the quarterback for the New England Patriots, who line up tonight against the Green Bay Packers in American football's Superbowl. It is widely accepted that if Bledsoe has an inspired match, the Patriots, representing the AFC, could beat the Packers, who are the NFC champions.

The significance for Wall Street is that the history of the Superbowl suggests that when the NFC team wins the market rises - the cynic would say that as stock markets tend to rise and the NFC team tends to win the Superbowl this is hardly surprising. But when the AFC last won the Superbowl in 1984, the Dow Jones Industrial Average had hit its high for the year at 1,286.64 on 6 January, just a few days previously. It fell steadily to a low of 1,086.56 nearly seven months later and showed a loss for the year as a whole.

After the losses of the last two days, Wall Street is feeling fragile. Bledsoe could complete the rout.

News
people
News
people And here is why...
News
peopleStella McCartney apologises over controversial Instagram picture
Life and Style
Laid bare: the Good2Go app ensures people have a chance to make their intentions clear about having sex
techCould Good2Go end disputes about sexual consent - without being a passion-killer?
PROMOTED VIDEO
Arts and Entertainment
Richard Burr remains the baker to beat on the Great British Bake Off
tvRichard remains the baker to beat as Chetna begins to flake
News
i100
Sport
footballArsenal 4 Galatasaray 1: Wenger celebrates 18th anniversary in style
Arts and Entertainment
Amazon has added a cautionary warning to Tom and Jerry cartoons on its streaming service
tv
News
people
News
The village was originally named Llansanffraid-ym-Mechain after the Celtic female Saint Brigit, but the name was changed 150 years ago to Llansantffraid – a decision which suggests the incorrect gender of the saint
newsWelsh town changes its name, but can you spot the difference?
News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
Kristen Scott Thomas in Electra at the Old Vic
theatreReview: Kristin Scott Thomas is magnificent in a five-star performance of ‘Electra’
News
Destructive discourse: Jewish boys look at anti-Semitic graffiti sprayed on to the walls of the synagogue in March 2006, near Tel Aviv
peopleAt the start of Yom Kippur and with anti-Semitism flourishing, one Jew can no longer ignore his identity
Life and Style
Couples who boast about their relationship have been condemned as the most annoying Facebook users
tech
Arts and Entertainment
Hayley Williams performs with Paramore in New York
musicParamore singer says 'Steal Your Girl' is itself stolen from a New Found Glory hit
News
i100
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Trust Accountant - Kent

NEGOTIABLE: Austen Lloyd: TRUST ACCOUNTANT - KENTIf you are a Chartered Accou...

Graduate Recruitment Consultant - 2013/14 Grads - No Exp Needed

£18000 - £20000 per annum + OTE £30000: SThree: SThree are a global FTSE 250 b...

Law Costs

Highly Competitive Salary: Austen Lloyd: CITY - Law Costs Draftsperson - NICHE...

Day In a Page

Italian couples fake UK divorce scam on an ‘industrial scale’

Welcome to Maidenhead, the divorce capital of... Italy

A look at the the legal tourists who exploited our liberal dissolution rules
Time to stop running: At the start of Yom Kippur and with anti-Semitism flourishing, one Jew can no longer ignore his identity

Time to stop running

At the start of Yom Kippur and with anti-Semitism flourishing, one Jew can no longer ignore his identity
Tom and Jerry cartoons now carry a 'racial prejudice' warning on Amazon

Tom and Jerry cartoons now carry a 'racial prejudice' warning on Amazon

The vintage series has often been criticised for racial stereotyping
An app for the amorous: Could Good2Go end disputes about sexual consent - without being a passion-killer?

An app for the amorous

Could Good2Go end disputes about sexual consent - without being a passion-killer?
Llansanffraid is now Llansantffraid. Welsh town changes its name, but can you spot the difference?

Llansanffraid is now Llansantffraid

Welsh town changes its name, but can you spot the difference?
Charlotte Riley: At the peak of her powers

Charlotte Riley: At the peak of her powers

After a few early missteps with Chekhov, her acting career has taken her to Hollywood. Next up is a role in the BBC’s gangster drama ‘Peaky Blinders’
She's having a laugh: Britain's female comedians have never had it so good

She's having a laugh

Britain's female comedians have never had it so good, says stand-up Natalie Haynes
Sistine Chapel to ‘sing’ with new LED lights designed to bring Michelangelo’s masterpiece out of the shadows

Let there be light

Sistine Chapel to ‘sing’ with new LEDs designed to bring Michelangelo’s masterpiece out of the shadows
Great British Bake Off, semi-final, review: Richard remains the baker to beat

Tensions rise in Bake Off's pastry week

Richard remains the baker to beat as Chetna begins to flake
Paris Fashion Week, spring/summer 2015: Time travel fashion at Louis Vuitton in Paris

A look to the future

It's time travel fashion at Louis Vuitton in Paris
The 10 best bedspreads

The 10 best bedspreads

Before you up the tog count on your duvet, add an extra layer and a room-changing piece to your bed this autumn
Arsenal vs Galatasaray: Five things we learnt from the Emirates

Arsenal vs Galatasaray

Five things we learnt from the Gunners' Champions League victory at the Emirates
Stuart Lancaster’s long-term deal makes sense – a rarity for a decision taken by the RFU

Lancaster’s long-term deal makes sense – a rarity for a decision taken by the RFU

This deal gives England a head-start to prepare for 2019 World Cup, says Chris Hewett
Ebola outbreak: The children orphaned by the virus – then rejected by surviving relatives over fear of infection

The children orphaned by Ebola...

... then rejected by surviving relatives over fear of infection
Pride: Are censors pandering to homophobia?

Are censors pandering to homophobia?

US film censors have ruled 'Pride' unfit for under-16s, though it contains no sex or violence