City firms seek to raise rump stakes: Jason Nisse on a challenge to the way surplus rights issue shares are disposed of

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The Independent Online
THE COSY world of the rights issue is coming under question in the City, threatening to disturb a last bastion of the old practices that existed before Big Bang in 1986.

So far attention has focused on the way the issue itself is drawn up, which is both expensive and time-consuming. The system involves paying a 2 per cent underwiting commission for new rights shares, most of which ends up with the same fund managers who are the company's largest investors in the first place.

Now the attack is turning to what is known as the rump of the issue - the shares that nobody wants. Even in the most succesful of issues, it is rare for all the rights shares to be completely taken up by shareholders. Many smaller investors cannot afford, or are not well enough organised, to take up their allocation. They are known as 'deads'.

Traditionally, the shares to which the deads are entitled - the rump - are placed with institutions by the broker to the issue. Any profit over and above the rights issue price goes back to the deads.

Little noise has come from the deads themselves, who have neither the clout nor the inclination to question the process. However, some of the more inconoclastic firms such as Swiss Bank Corporation, Goldman Sachs and Salomon Brothers are now taking up cudgels on their behalf.

They argue that there is no incentive for the broker to get the best possible price for the rump. Brokers make their money trading with large institutions, and if they can sell them shares relatively cheaply the client is more likely to trade with them again.

The iconoclasts want a much more open process, based on the post-Big Bang 'bought deal', in which a broker buys a block of shares from investors and sells it in the market.

Firms such as Goldman, Smith New Court and SBC have become expert at this technique. They say a more efficient way to place the rump would be to offer the block to the highest bidder, which would then try to resell the shares for its own gain.

As yet no rumps have been sold this way. SBC says it has bid for three rumps this year but has been frozen out of the bidding each time.

It will not say which rumps they were, but the Independent has learnt that one was Zeneca, where 13.8 per cent of the issue was left with the underwriters. This rump was placed at 612p, 12p more than the issue price but at a discount to the trading price, which rose 14p to 632p on the day the rump was placed.

More traditional brokers argue that if these firms wanted to buy the rump they could bid against institutional investors, leaving the broker honour- bound to take the best price. However, a scenario where brokers bid against their own customers for shares is hard to imagine.

With the Office of Fair Trading already looking into underwriting commissions, it looks as if another of the City's long-established practices is about to fall by the wayside.