Blueprint system could avoid costly delays

Tag : System Call

Companies could be required to prepare a blueprint for an emergencycash call under proposals being drawn up by the City authorities toprevent a rerun of the HBOS rights issue flop.
The plan is being discussed in the City, where questions are beingraised about the efficiency of a system that meant only a tinyminority of HBOS shareholders could be convinced to back its cashcall.
This is because the lender's share price had fallen so sharplyduring the 57 days it took to raise the funds that it no longermade sense for investors to subscribe to the issue. They could buythe shares lower than the 275p at which the rights issue waspriced. The bank's shares more than halved during the period.
This has prompted a debate in the City about the length of time therights issue process takes and prompted a series of measures to bediscussed in a working party headed by the chief executive of theFinancial Services Authority, Hector Sants, and Kitty Ussher fromthe Treasury.
One plan would involve companies having a document ready to issueto investors in the event of a cash call that could be updatedthrough amendments.
This document, or blueprint, is intended as an alternative to aprospectus, a detailed assessment of a company's financial healththat is a crucial part of the process. A prospectus is required toallow a shareholder meeting to ratify the issue. Once theshareholder meeting takes place there must be a three-week periodof share trading before the rights issue closure.
Although HBOS announced its intention to raise £4bn through arights issue on April 29, it did not publish a prospectus untilJune 19, which slowed down the process of raising funds.
Royal Bank of Scotland, which announced its record-breaking£12bn rights issue a week before HBOS, published itsprospectus on April 30, allowing it to close its rights issue onJune 9.
HBOS was particularly hampered by the fact it had to post 6m itemsto more than 2 million shareholders and give investors time torespond to the documents.
Though investors are concerned about the length of time this took,they are thought to be keen to retain the key principle of a rightsissue, preemption rights. This means existing shareholders must begiven a chance to participate in an issue of new shares so thattheir influence over a company is not reduced through dilution.