OFT delays rights decision
The lack of share issues has prevented the referral of the City'sunderwriting practices to the Monopolies Commission.
The Office of Fair Trading has put off making any decision on whether to refer City share issue underwriting practices to the Monopolies & Mergers Commission because there have been so few rights issues in recent months.
Director general John Bridgeman said in December that he would monitor progress in introducing more innovative rights issue and new issue mechanisms, and that he expected to make a decision on referral by the end of March 1997.
But a spokesman for the OFT said there have been too few share issues since the start of the year to make any proper judgement as to whether the City has made enough progress in abandoning its much-criticised fixed-fee underwriting system.
Traditionally, an equity issue carries a 2% underwriting charge, with 1.25% going to the sub-underwriting institutional investors, 0.5% to the lead underwriter (often the sponsoring merchant bank) and 0.25% to the stockbroking firm which organises the sub-underwriting.
Richard Regan, head of investments at the Association of British Insurers, said that virtually all of the rights issues that have taken place this year have incorporated some flexibility in the sub-underwriting fees, with institutions bidding against each other to reduce at least part of the sub-underwriting fee. All of the rights issues so far this year have been by relatively small companies, however.
Investment bank BZW has developed plans for a hybrid rights and ‘bookbuilding’ issue, which would raise as much money from investors as possible rather than a fixed, pre-set figure. Nigel Turnbull, finance director at Rank Group and chairman of The Hundred Group’s technical committee, welcomed BZW’s initiative, but said: ‘The problem is we need a company that wants to do a rights issue to pioneer it.’
But a simpler solution is being ignored. The OFT said in December that it was a ‘significant conundrum’ as to why deep-discounted rights issues, which generally require no underwriting at all, were not far more common.
Regan said that they were ‘the most cost-efficient form of capital-raising’, though they require dividend pay-out rates to be adjusted to allow for the large scrip element.
Turnbull said that deep-discounted issues had ‘a number of psychological barriers. Some of us like to “grow” our earnings’. It can sometimes be difficult to explain how a dividend has ‘increased’ from say 20p a share to 13p, he said.
