City and industry deadlocked over fees

An attempt by industry and the City to agree joint proposals to reduce the costs of rights issues and fight off a Government inquiry is foundering, despite substantial concessions offered by big investment institutions.

The institutions are trying to head off tough criticisms by the Office of Fair Trading, which may recommend a reference of City fees to the Monopolies and Mergers Commission.

As part of the campaign, pension fund and insurance industry representatives on a CBI working group have offered to encourage a move by merchant banks to reduce sub-underwriting fees, a lucrative source of income for the institutions.

They have also said they will back companies that decide to cut their dividends when they make rights issues, which would further reduce the cost of new capital.

Because rights issues are sold at a discount, the normal practice of maintaining the dividend actually increases the cash distribution to shareholders, raising the cost of capital. This has led to sharp criticisms of conventional underwritten rights issues, especially by US investment banks.

Despite the concessions, senior City and industry representatives in the working group - which includes John Mayo, finance director of Zeneca - are believed to have reached deadlock following a dispute over the closely related question of pre-emption rights. These give existing shareholders first call on new shares in a rights issue.

Industry representatives have been pressing for an increase in the level at which companies can issue new shares without permission from shareholders, from the current 5 per cent to at least 15 per cent.

The industry side believes a higher ceiling would reduce the cost of capital to companies, but institutions deny this claim.

Institutional sources believe that a compromise proposal, under which the pre-emption rights ceiling would be raised but a formula introduced to protect shareholders by controlling the discount on the rights issue, is likely to be completely unworkable.

The National Association of Pension Funds and the Association of British Insurers, whose director general is Mark Boleat, have a total of four representatives on the CBI group, which is an offshoot of the employers' companies committee.

The institutions' willingness to consider lower fees emerged after a meeting between the NAPF, the ABI and the London Investment Bankers Association, which represents the bankers who organise rights issues.

The bankers told the ABI and the NAPF that members planned to introduce increasing flexibility into the flat fees of 1.25 per cent charged for sub-underwriting, regardless of the size of company or the amount of cash raised. The ABI has now told members to expect offers of lower fees.

Suggestions by investment banks include the introduction of tender offers for sub-underwriting so there would be competition on fees, and lower rates of commission than 1.25 per cent for parts of an issue.

The ABI has also pressed members to encourage finance directors to consider whether underwriting can be dropped for certain issues.