UK companies and shareholders are not getting a fair deal as banks charge too high underwriting fees for minimal risk, report says

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Written by Ray Clancy

Tuesday, 14 December 2010 11:26

High underwriting fees charged by banks to insure against minimal or non existent risk is not a good use of shareholders’ money, it is claimed.

There is widespread concern amongst institutional investors about the high level of fees and the lack of transparency around how much is actually paid, to whom it is paid and what is paid for, research shows.

UK listed companies feel that they are needlessly paying large sums of money to insure against minimal or virtually non-existent risks. This shareholder cost is ultimately borne by ordinary savers and investors, the report commissioned by the Institutional Investor Council shows.

The Rights Issues Fees Inquiry report also shows that fee levels have been increasing for many years and remain high, despite market participants’ steps to reduce significantly the risks associated with rights issues.

Institutional investors are also concerned that underwriting fees are being increasingly taken by those without an interest in the long term success of the company or in ensuring that the costs of capital raising are as low as practicable. The system is not as efficient as it should be and investors, banks and issuers need to work together to make improvements, the report says.

To ensure a better deal for companies and their shareholders, the Rights Issue Fees Inquiry has issued a number of recommendations looking at shareholder involvement, competition, disclosure and transparency.

It recommends that issuers should be required to disclose in more detail how much is paid in fees, who is paid and what exactly they are paid for. Issuers should also be actively involved in compiling the list of sub-underwriters.

It say greater oversight of and improved governance of the capital raising process is required within the corporate environment and companies without in-house expertise in equity capital raising should use non-conflicted, independent advice. Companies should consider putting underwriting out to competitive tender.

The report suggests that investors, issuers and banks should explore how to improve the market for sub-underwriting and institutional investors should develop guidance as to what they expect of their companies in a rights issue. While shareholders should be more willing to be taken ‘off market’ and engage with issuers and their advisers in an open manner.

‘The UK’s rights issue regime stands as a gold standard for capital raising worldwide. It works well and is widely recognised as a fair and efficient way for companies to raise capital,’ said Douglas Ferrans, chairman of the Rights Issue Fees Inquiry.

‘However, companies are paying too much to ensure the deal is a success. There is a significant lack of clarity around fees and a complete lack of transparency. We just don’t know who is getting rewarded and for what,’ he explained.

‘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. Companies and their shareholders are not getting a fair deal and that needs to change,’ he added.