Don't sell those shares yet

Clifford German on what to do with Norwich Union windfalls

The 2.9 million members of Norwich Union have until 11am next Thursday to vote by post on whether they want the Norwich Union to convert into a public company and scatter pounds 4bn worth of free shares to members.

If they miss the postal deadline they can vote at the EGM at the London Arena next Friday. It needs 75 per cent of the votes cast to be in favour of the conversion plan. If it is approved Norwich Union would issue a prospectus in May and become a public company in June.

Norwich Union clearly hopes as many as possible of its members will keep the free shares they will receive and even add to them by buying extra shares at a discount in the public offer which follows the free issue.

The more shares the public takes up, the fewer will be available for institutions and the scarcer and more valuable the shares will become.

Members will be able to sell their free shares immediately for cash if they want to. But unless there is a dramatic collapse in share prices the general opinion is that they will make a good investment, especially as Norwich Union will be one of the 40 biggest public companies in the country and will join the FTSE 100 within a month of flotation.

This means that institutional investors and tracker funds will need to hold Norwich Union shares, and as small investors will hold at least 70 per cent of the shares in issue after the float, institutions will need to buy heavily to boost their holdings.

Small investors who want to keep their shares will have 42 days from receipt of their shares to put them into a PEP, where they will be exempt from income tax on the dividends and any possible capital gains tax on future disposals.

At least a dozen fund managers have by now said they will accept windfall shares into a general PEP, either on their own or alongside other shares.

The downside is, of course, that no one can have more than one general PEP each year and anyone who has started making contributions to a general PEP since 5 April will not by definition be able to open another one until April 1998.

Norwich Union members who lose their general PEP entitlement in this way, and any who want to buy extra shares should consider putting them into a single company PEP. Investors can have only one PEP invested in the shares of a single company each year, but under Inland Revenue rules the free shares have nil initial value so up to pounds 3,000 worth of extra shares in the same company can be put into a single company PEP.

The public offer of extra shares in Norwich Union makes it a logical candidate for a single company PEP.

By opening a single company PEP investors leave themselves free to hold a general PEP with another provider, perhaps to contain their windfall shares from a building society.

Norwich Union has no immediate plans to provide share dealing services however, unlike Halifax, which intends to use its conversion to a bank with 8 million shareholders as a platform to provide share-dealing services.

Halifax will launch a Shareholder Account to hold share certificates for Halifax shareholders and a will offer a cheap share-dealing service for those who want to sell.

The shareholder account will eventually be extended to serve as a nominee account holding shares in other companies.

Meanwhile members of Alliance & Leicester who failed or were unable to get their replies back in time to have their shares parcelled up for immediate sale have now been given until April 15 to sell them free of charge.

But most City folk think the shares will appreciate as soon as trading starts on 21 April, so a few days delay in selling could easily pay for the dealing charge on subsequent sales.

Those who want to hold their shares may be better off by waiting. They can claim the shares at any time although they have only 42 days from the official distribution date to put them into a PEP without incurring dealing charges.