Inquiry calls for full disclosure of rights issue fees
• Underwriting fees hit 3.4% in the 2007-2009 financial crisis
• A record £49.4bn was raised by rights issues in 2009
Companies which tap investors for cash should be required to provide a break-down of fees paid to investment banking advisors to stop them being overcharged, according to an inquiry into rights issues published today.
The inquiry, led by a group of City investors, found that companies which conducted rights issues were charged fees that were 10 times more than they paid their own directors. The cost is ultimately borne by shareholders who are ordinary savers and investors in pension funds and who only receive an aggregate figure of fees paid.
The inquiry could find no “plausible justification” for the rise in fees that has taken place since the Monopolies and Mergers Commission conducted an investigation into the issue 13 years ago, aside from the period during the banking crisis. Underwriting fees were 2% before the MMC, rose to 2.9% afterwards and hit an average of 3.4% in the 2007-2009 financial crisis.
The Office of Fair Trading launched an inquiry in June and is due to publish its findings next month.
A record £49.4bn was raised by rights issues in 2009, smashing the pervious record in 2008 of £27bn when banks were forced to tap shareholders for cash. Douglas Ferrans, chairman of the Rights Issue Fees Inquiry (RIFI), said: “Companies are paying too much to ensure the deal is a success. On average companies who have had rights issues have paid ten times more in fees than that which was paid to their executive team in total reward. Whilst remuneration rightly comes under the spotlight, very little light is shone on these larger numbers.”
Leading City investors do not want to radically overhaul rights issues which allow existing shareholders the “right” to buy new shares being issued to prevent their influence being diluted by new investors arriving on the register.
But Ferrans noted: “Companies and their shareholders are not getting a fair deal and that needs to change.”
The inquiry calls for fees paid for underwriting and advisory services to be disclosed to the stock market and in the next annual report. Companies should also consider whether they might only need to underwrite part of their issue to reduce the cost. One of the ways to do this is with greater consultation. This presents problems of putting insiders in receipt of information that could move a share price so the inquiry suggests that institutional shareholders should consider appointing those who can be taken “off market” to discuss such matters with companies.
The inquiry was led by City investor groups including the Investment Management Association, the Association of British Insurers (ABI) and the National Association of Pension Funds (NAPF). The Inquiry was commissioned by the Institutional Investor Council.
Loading ...