HSBC under fire from British shareholders

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The Independent Online
HSBC Holdings, owner of Hongkong and Shanghai Bank, is facing the embarrassing and costly prospect of a radical restructuring of its share capital less than three months after its acquisition of Midland Bank.

British investors are angry that the sterling shares issued as consideration for Midland have begun to trade at a significant discount to the bank's existing Hong Kong dollar shares and are pressing for changes.

At times, the discount has been as much as 30p a share, a potential total loss to UK fund managers of pounds 240m.

The anomaly arose because the new sterling shares - which carry exactly the same rights as the existing HK dollar shares - are legally a different class of capital and therefore not 'fungible'. That means the two cannot be treated as a single class of capital and therefore cannot be delivered against each other.

Financial advisers to HSBC, including Schroders and Cazenove, were alerted to the potential problems at the time of the bid but apparently failed to heed the warning.

Willie Purves, chairman of HSBC, is said to be angry that he was not made fully aware of the likelihood of a big discount developing.

At an analysts' meeting in London last week, he said that if the disparity failed to correct itself, the bank would address the problem.

Schroders said there was 'no rational explanation' why the two classes of share should trade at different prices. It conceded that it had failed fully to anticipate the problem.

Schroders had recommended that new sterling shares should be issued to Midland Bank shareholders, because it was thought at the time that they would be more acceptable to British fund managers than HK dollar shares.

It said it believed one possible reason for the disparity was that British analysts and institutions were not yet sufficiently familiar with HSBC. It was early days, and once the market settled down the discount might disappear, Schroders suggested.

One institution claimed it was obvious, however, that the shares would trade at different values because, unless fully fungible, they were likely to reflect the differing valuations of the Hong Kong and London markets.

One plan being mooted to correct the problem is for HSBC to set up a scheme to buy the sterling shares and issue HK dollar shares in return. However, this could prove costly and difficult to administer.

HSBC last week surprised analysts by announcing a 51 per cent leap in half-year profits to HKdollars 5bn ( pounds 325m).

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