City to examine BZW cash route

Institutions said yesterday that they had agreed to participate in a detailed examination of a new technique for raising capital for companies, following a meeting at BZW last Friday.

BZW put forward a proposal aimed at resolving a dispute in the City about the future of shareholders' pre-emption rights which could also help fend off a threatened monopolies inquiry into the City's charges for capital-raising.

Richard Regan of the Association of British Insurers, called the meeting "constructive and productive". The institutions are to examine the proposal in more detail in a working group with BZW. The meeting included representatives of the National Association of Pension Funds.

BZW told the institutions that it was possible with its new proposals to sell shares through a book-building exercise while preserving the pre-emption right of existing shareholders to first refusal of new shares, pro rata to their existing holdings.

Book-building is an American import in which shares are marketed directly to all potential buyers, not just existing shareholders. Until now it has been seen as a direct attack on the British system of rights issues because under a book-building existing shareholders receive no special treatment. The two methods were seen as mutually exclusive.

Although the debate is about a technicality of corporate finance, it has split the City down the middle. Integrated investment banks want to use bookbuilding much more extensively.

But traditional merchant banks and most investing institutions have regarded bookbuilding as a way of undermining their pre-emption rights, and they claim it also brings much bigger fees to advisers.

However, there appear to be several unanswered questions about BZW's plans, including the impact on small shareholders and the size of the fees that would be charged to companies.

Another important technicality that the institutions want resolved is how trading in nil-paid rights would be preserved. Under the traditional system, the right to subscribe to an issue can have a value of its own that can be bought and sold without actually subscribing for the shares.

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