Prism drops share scheme after big investors' protest

Prism, the owner of four passenger rail franchises, yesterday bowed to pressure from institutional investors and scrapped a controversial bonus share scheme that had made paper profits of more than pounds 30m for its founding shareholders. "It looked a mite greedy to us," said one leading fund manager.

The scheme, set up to cover the costs of the founding directors, who have put up pounds 2.6m of their money for tendering for rail franchises, will not kick in if Prism wins any more train operating bids. Prism is on the shortlist for North West Regional Railways and Scotrail.

However, the seven directors, including the chairman, Godfrey Burley, and Len Wright, and one business partner will keep the shares they have already been awarded for previous rail franchise gains. Their stake in Prism was worth pounds 35m at last night's closing price of 550p, down 30p on the day. The shares have soared since they were placed at 100p on the Alternative Investment Market a year ago.

Prism said that following "consultations with certain major shareholders" it was terminating the share ratchet scheme that had operated on passenger rail franchises awarded so far.

"This reflects the company's bidding success and the fact that the continuing need for a ratchet mechanism no longer exists," Prism said.

Instead, Prism will fund the costs and expenses of tenders for the remaining rail franchise tenders by converting the appropriate amount of existing deferred shares held by the directors into ordinary equity. This will be based on the mid-market price of Prism's shares at the time that the preferred bidders are announced. Directors will be allowed to subscribe to any rights issue needed to fund a new franchise win.

It was the award of West Anglia Great Northern, Prism's latest rail franchise, that provoked a storm of protest about the directors' share bonanza.

They were granted free shares worth pounds 5.4m as part of a pounds 12m rights issue to help fund the contract to run the heavily subsidised line, which runs from London to Stansted Airport, Cambridge and Peterborough.

Some commentators estimated that the cost of capital to Prism's shareholders of that deal was as high as 50 per cent.

A company spokesman denied institutional shareholders had revolted against the ratchet scheme: "The directors want the company to appear mature and reflect the public mood."

However, a leading fund manager insisted that leading investors had let it be known they were unhappy with the scheme.