Last night Yorkshire Water Watch, the pressure group, was writing to Ian Byatt, the industry regulator, claiming that the cash raised to fund the payout had been wrongly removed from the core water and sewerage businesses two years ago.
The scheme was condemned by Frank Dobson, Labour's environment spokesman, who said it endorsed the party's case for a windfall tax on the privatised utilities.
"It's only companies that are rolling in money that can afford share buy-backs. Since Yorkshire water was privatised it's made pounds 934m in profits and paid out pounds 300m in dividends, yet it's paid no tax at all on its water and sewerage business," he said.
The company said its aim was to include as many of its 50,000 small investors as possible in the scheme, which was designed to raise its debt to more efficient levels. Gearing would increase from 20 to 35 per cent.
Under the complex arrangement, which it emphasised would be neutral for tax purposes, existing investors get two ordinary shares and two new B shares for every share they hold.
Yorkshire Water will reduce the number of ordinary shares in a nine-for- 10 consolidation and offer to buy back all the B shares for 36p each.
An investor with 100 old shares would end up with 180 new ordinary shares and pounds 72 in cash.
Brian Wilson, the finance director, said: "It is analogous to a 10 per cent share buy-back. But it's done in a way that treats all shareholders evenly."
Yorkshire Water first proposed a 10 per cent share buy-back in 1995, but postponed the plans during that summer's drought, which brought its supply system to the brink of collapse.
Last June, Brandon Gough, the newly appointed pounds 120,000-a-year part-time chairman, delayed its implementation to the disappointment of City institutions. Yesterday Yorkshire Water shares gained 17.5p to 735p.
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