London's banks will be accused today by the City's institutional shareholders of massively overcharging for underwriting share issues.
The Rights Issue Fees Inquiry – backed by bodies representing Britain's biggest institutional shareholders – says there is widespread concern among investors about the level of fees charged and who benefits.
Douglas Ferrans, the chairman of the inquiry which will publish its report today, said listed companies often paid out 10 times what their entire boards of directors cost for a rights issue, with little scrutiny of where the fees were going or whether they were worth it.
As an underwriter, a bank agrees to take new shares issued by a company if there is not enough demand in the market. But the inquiry said the risks of doing this had reduced considerably in recent years because new shares issued in this way tended to be sold at deep discounts, ensuring demand.
Mr Ferrans said: "When I raised the issue of fees with banks I was told that the amount of money was small. But if you compare it with what directors are paid, the amount is typically 10 times the total cost of the boardroom to shareholders. Despite this, boardroom pay is under far greater scrutiny than the fees for rights issues."
While the inquiry found that rules on capital raising generally worked well, Mr Ferrans said: "UK-listed companies feel that they are needlessly paying large sums of money to insure against minimal or virtually non-existent risks. This shareholder cost is ultimately borne by ordinary savers and investors. The system is not as efficient as it should be and investors, banks and issuers need to work together to make improvements."
The report committee has been liaising with the Office of Fair Trading, which is also conducting its own study into rights issue fees and has the power to force changes.
The inquiry recommends that companies be required to disclose in more detail how much is paid in fees, who is being paid and what exactly they are being paid for. It also wants to see companies without expertise in raising capital calling in independent advice.
It wants companies to consider putting underwriting out to competitive tender and investors, issuers and banks to explore how to improve the market for sub-underwriting share issues.
And it says shareholders should spell out what they expect from companies and banks and to be more willing to go "off market" and discuss capital needs with companies even if that would prevent them from trading in those companies' shares for a time.
A spokesman for the Association for Financial Markets in Europe, which represents London's investment banks, said: "The market for providing investment banking services including underwriting is, in fact, highly competitive and is getting more so as demand from the corporate sector has been falling. Uncertain markets have made underwriting a more risky activity for the banks at a time when all have been urged to manage their exposure to risk more robustly."
The study was backed by investor groups including the Association of British Insurers, the National Association of Pension Funds and the Investment Management Association.
Those Rights issue fees
* In the last year there have been just three rights issues by companies raising more than £50m. * National Grid raised £3.32bn in June. Total bank commissions amounted to 2.75 per cent, resulting in a fee of £91.3m. The most recent annual report shows the total cost in pay, bonuses, perks and fees of the company's directors came to £8.2m.* Resolution is a slightly more complex case. It raised £2.1bn and paid its banks 3.25 per cent, amounting to £68m. Last year's annual report shows boardroom costs came in at £2.6m, although the deal actually heavily involved shareholders, with the net fee reduced through them sub-underwriting. Boardroom costs also appear lower than they actually are because that figure covers just the operating business and not what is paid to Clive Cowdery – the man behind the group's creation – and his colleagues through a sizeable management contract. * Standard Chartered raised £3.3bn in October, with 2.15 per cent in fees and commissions to banks. That totals £71m. The board cost shareholders $33m (£21m). Perhaps it's no surprise that the company got a good deal: Standard Chartered is, after all, another bank.