OFT grants City more time to cut rights costs

The launch of half-a-dozen cut-price rights issues since the summer has staved off the immediate threat of a monopolies inquiry into the City's charges for raising capital for companies, the Office of Fair Trading said yesterday.

But John Bridgeman, director general of Fair Trading, made it clear that an investigation by the Monopolies and Mergers Commission was still a possibility, and he was to make a final decision by the end of next March.

Mr Bridgeman said that in the light of "real but limited progress" in reducing City underwriting commissions, especially through a new auction process, he would not refer the market to the MMC "at present".

However, a handful of innovative rights issues was not enough to make a judgement that the problems identified by his predecessor, Sir Bryan Carsberg, had been resolved. The OFT believes commissions are excessive in relation to the risks borne by underwriters.

He urged companies to take advantage of the increased willingness of the City to offer flexible terms rather than fixed fees, and to increase the pressure on their advisers for reductions.

He also urged companies to insist that their merchant bank advisers do not take the role of lead underwriter, to eliminate conflict of interest.

In addition, Mr Bridgeman stepped up the OFT's campaign to persuade companies to make deeply discounted rights issues that require no underwriting.

The announcement was the latest stage in a campaign waged by the OFT against the City's long-established system of fixed underwriting and sub- underwriting commissions for rights issues, which total 2 per cent of the value of an issue plus a top-up for longer underwriting periods.

An OFT survey up to May this year, published with Mr Bridgeman's announcement, found there had been little response to pressure for lower charges.

Since then leading City institutions and merchant banks have come to an agreement on a broad strategy to head off the threatened reference.

The first fruit was a rights issue by Mercury Asset Management for Cairn Energy in June, when the sub-underwriting commission was slashed to 0.5 per cent from the standard 1.25 per cent.

The breakthrough in winning the reprieve was a series of five innovative deals starting in late October with a rights issue by Schroders for Stakis, which included an auction of part of the underwriting.

This saved the company a significant amount of money. Schroders has organised one more auction and Kleinwort Benson has done three.

Mr Bridgeman said developments since May represented a "first tentative step towards reform in this market" and he particularly welcomed the auctions.

He praised the Association of British Insurers, the National Association of Pension Funds and the London Investment Banking Association for backing them.

He also welcomed their new willingness to adjust dividends per share downwards to take account of the fact that a rights issue at a discount in effect includes a scrip issue of free shares.