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

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.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA celebration of British elections
Arts and Entertainment
Billie Piper as Brona in Penny Dreadful
tvReview: It’s business as usual in Victorian London. Let’s hope that changes as we get further into the new series spoiler alert
Life and Style
A nurse tends to a recovering patient on a general ward at The Queen Elizabeth Hospital in Birmingham
health
News
Fans take a selfie with Ed Miliband in Kempston, near Bedford, on Tuesday
election 2015
Arts and Entertainment
No Offence
tvReview: No Offence has characters who are larger than life and yet somehow completely true to life at the same time spoiler alert
News
Chuck Norris pictured in 1996
people
  • Get to the point
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

Ashdown Group: Editor-in-chief - Financial Services - City, London

£60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Guru Careers: Project Manager / Business Analyst

£40-50k + Benefits.: Guru Careers: A Project Manager / Business Analyst is nee...

SThree: Trainee Recruitment Consultant - Swiss Banking and Finance

£20000 - £25000 per annum + Uncapped commission: SThree: Can you speak German,...

Day In a Page

General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

Miliband's unlikely journey from hapless geek to heart-throb

He was meant to be Labour's biggest handicap - but has become almost an asset
General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

On the margins

From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

'This is the battle of young Egypt for the future of our country'

Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

Why patients must rely less on doctors

Improving our own health is the 'blockbuster drug of the century'
Sarah Lucas is the perfect artist to represent Britain at the Venice Biennale

Flesh in Venice

Sarah Lucas has filled the British pavilion at the Venice Biennale with slinky cats and casts of her female friends' private parts. It makes you proud to be a woman, says Karen Wright
11 best anti-ageing day creams

11 best anti-ageing day creams

Slow down the ageing process with one of these high-performance, hardworking anti-agers
Juventus 2 Real Madrid 1: Five things we learnt, including Iker Casillas is past it and Carlos Tevez remains effective

Juventus vs Real Madrid

Five things we learnt from the Italian's Champions League first leg win over the Spanish giants
Ashes 2015: Test series looks a lost cause for England... whoever takes over as ECB director of cricket

Ashes series looks a lost cause for England...

Whoever takes over as ECB director of cricket, says Stephen Brenkley
Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power