The Treasurer February 2011

The rights stuff

Institutional investors have been expressing unease for some time about the underwriting fees charged by banks for rights issues.

Following consultation with many participants in equity capital raising, the Institutional Shareholders’ Committee published the report of its Rights Issue Fees Inquiry (RIFI) in December, which concludes that a significant portion of the fees companies pay for underwriting rights issues is a poor use of shareholders’ money.

The report (available at may have been released in the run-up to Christmas but its conclusions should not be packed away with the season’s decorations. It reveals concern among institutional investors about the high level of underwriting fees that banks charge, and the lack of transparency around how much is actually paid, to whom and for what. The report says that fee levels have been increasing for years and remain high, despite steps taken by market participants to reduce significantly the risks associated with rights issues.

This is an issue of importance to treasurers, who should be playing their full part in ensuring shareholders receive proper value for money in rights issues and it is a topic we will be covering in future issues of The Treasurer.

The inquiry looked at a selection of underwriting fees and found that, typically, gross fees for an issuer were 10 times the total reward it paid its executive directors in the year that the rights issue took place. But while top people’s pay has repeatedly generated public uproar, there is no popular outcry against this expense.

As a result of its investigations, the inquiry has made recommendations about transparency, competition and shareholder involvement. They include issuers disclosing in detail all fees paid to whom and for what. Companies are also challenged to seek independent advice when undertaking a rights issue (unless the directors are particularly experienced), and it is suggested that the primary underwriting contract should be put out to tender. Another recommendation is that institutional shareholders should appoint an individual who can be taken "off market" and so be free to speak to issuers and advisers.

This is not a new concern. The last major report into the issue was by the Monopolies and Mergers Commission as long ago as 1999. While it is clear that a number of weaknesses have developed over the years – particularly the inefficient and opaque ways fees are paid for risk taking and other services – the latest inquiry has confirmed the significant strengths that exist in the UK’s pre-emption regime and market-based rights issue system. This is a question of improvement, not destruction.


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