Fund-raising change agreed

City accepts alternative to underwritten rights issues to avoid MMC reference

Institutional shareholders are preparing to embrace an innovative new method of raising equity to head off a reference of underwriting commissions to the Monopolies and Mergers Commission.

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.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA celebration of British elections
  • 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

Recruitment Genius: Claims Administrator

£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

Recruitment Genius: Senior SEO Executive

£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

Recruitment Genius: Online Customer Service Administrator

£16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...

Recruitment Genius: Digital Marketing Executive

£18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...

Day In a Page

'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
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Russell Brand's interview with Ed Miliband has got everyone talking about The Trews

Everyone is talking about The Trews

Russell Brand's 'true news' videos attract millions of viewers. But today's 'Milibrand' interview introduced his resolutely amateurish style to a whole new crowd
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living
Increasing numbers of homeless people in America keep their mobile phones on the streets

Homeless people keep mobile phones

A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before
'Queer saint' Peter Watson left his mark on British culture by bankrolling artworld giants

'Queer saint' who bankrolled artworld giants

British culture owes a huge debt to Peter Watson, says Michael Prodger
Pushkin Prizes: Unusual exchange programme aims to bring countries together through culture

Pushkin Prizes brings countries together

Ten Scottish schoolchildren and their Russian peers attended a creative writing workshop in the Highlands this week
14 best kids' hoodies

14 best kids' hoodies

Don't get caught out by that wind on the beach. Zip them up in a lightweight top to see them through summer to autumn
Robert Fisk in Abu Dhabi: The acceptable face of the Emirates

The acceptable face of the Emirates

Has Abu Dhabi found a way to blend petrodollars with principles, asks Robert Fisk