John Bridgeman, Director-General of Fair Trading, has written to the big institutions warning them that if there is no progress in improving competition in underwriting he will make a reference by the end of March.
In his letter, Mr Bridgeman says he has decided against an immediate reference "in view of the real but limited progress which has been made so far".
However, he makes it clear that reform must be introduced swiftly. "Recent developments are expected to continue," he warns. "I expect to make a decision on a MMC reference in the first quarter of 1997."
The OFT's intervention has prompted institutional investors to reconsider a new method of raising equity that has been drawn up by the CBI in consultation with the corporate sector, investors and the authorities.
The new method, which would be offered alongside traditional underwritten rights issues, would remove fixed underwriting commissions but crucially would keep shareholders' pre-emption rights intact.
The National Association of Pension Funds is thought to be close to endorsing the new system. The Association of British Insurers has also softened its stance on the proposal.
Under the new system, demand for a new equity issue would be established by a book-building process that assessed investor interest in new shares at different prices. This would also allow for a deeply discounted rights issue.
However, investors would be allowed to preserve their pre-emption rights by simply agreeing to accept new shares at the strike price for their entire holding. This would protect small shareholders, who might wish to avoid the intricacies of the book building but might still want to participate in the fund raising.
The number of shares being sold could be varied so that the amount being raised remains constant. Any investor who accepts the offering at or above the strike price would be allocated their pro-rate entitlement. Any shares not accepted by existing investors would be available for outside investors and for existing investors who wanted more than their entitlement.
The new system has been examined by lawyers, who believe it complies with both British and European Union legislation protecting pre-emption rights.
The system is not intended to replace underwritten rights issues but to be available as an option to companies to raise money more efficiently and less expensively. The CBI believes that the new system would encourage the corporate sector to use equity as a constructive source of long- term investment funding.
If it is endorsed by the NAPF and ABI, it will head off the threat of a MMC reference for underwriting commissions since it would introduce the competition which the OFT is seeking.
A survey of rights issues carried out by the OFT last year showed that less than 10 per cent had any element of competitive tendering for underwriting commissions and that in standard rights issues the underwriting fee was never less than 2 per cent and could be as high as 3 per cent. Where competition was introduced, the fee varied and in some cases was waived.
Investors have expressed concern that the new system could increase the cost of capital but corporate treasurers have reassured them that the cost will fall.