British Insurers' rule change may produce a rush of rights issues

In a move likely to promote a slew of rights issues among listed British companies in 2009, an influential investor group lowered its requirements for such cash calls in a bid to speed up the process.

Under the new guidelines issued by the Association of British Insurers (ABI), companies would only need to hold shareholder votes when expanding their share capital by more than two thirds. They had previously needed to undertake the lengthy vote procedure for any share issuance representing more than one third of capital.

The guidance from the ABI is not legally binding but is widely-viewed as pointing to best practice and is therefore very influential on corporate behaviour, all the more at a time where companies are competing for increasingly scarce investor cash. The ABI's members own about 15 per cent of the stock market.

The decision also comes as companies across the board look to "re-equitise", boosting the equity-to-debt ratio in their financing structure as borrowing becomes more expensive – and sometimes no longer available.

While the current volatile stock markets are hardly the best environment to issue shares, many companies need to shore up their balance sheets and have little choice but to undertake such operations.

The ABI, which acts as a lobbying organisation for institutional investors, said that the goal was to make it easier for companies to initiate deeply discounted rights issues. The guidelines will be reviewed in three years.

The ABI was responding to concerns that rights issues were taking too long, endangering vulnerable companies and raising the chance of market abuse. The length of time taken in putting them through also sometimes allowed the shares to fall to below the heavily-discounted issue price, scuppering the companies' plans to raise cash from investors and leaving the underwriters with the securities. For example, the Royal Bank of Scotland rights issue announced in October only went through more than a month later, once the shares had fallen to 55p – more than 10p below the 65.5p price of the issue.

This meant the Government, which had underwritten the issue, had to take all the shares and now owns a majority stake in the bank.

The reform was one of several measures suggested by the Rights Issue Review Group, a body set up by the Chancellor in the wake of the prolonged and accident-prone capital-raisings by banks last summer.

However the ABI said the right of pre-emption – or that of existing shareholders to be first-entitled to take up any rights issue – must remain. The need to send a prospectus to a company's shareholders for them to exert this right was another time-consuming part of the process. But the ABI maintained it is important it remain.

"We are pleased to make this contribution to the work of the Review Group," Peter Montagnon, the ABI's Director of Investment Affairs, said. "ABI members fully support the need to speed up the rights issue process where possible, providing that the vital principle of pre-emption is respected."