The Institutional Investor Council has launched its expected inquiry into equity underwriting practices, and in particular the fees charged on rights issues.
As reported in a previous edition of UK Corporate Update available here, the Institutional Shareholders’ Committee established a new senior body, the Institutional Investor Council, on 18 May 2010. It was envisaged that the IIC would commission and oversee an inquiry by institutional investors into the fees paid on rights issues. On 5 July 2010, the Rights Issue Fees Inquiry, commissioned by the IIC, launched a consultation on equity underwriting practices and procedures in the UK. The RIFI is chaired by Douglas Ferrans (Chairman of the Investment Management Association and Invista Real Estate and a former chairman of Insight Investment).
In its consultation paper, the RIFI states that the study will examine the demand side of the investment banking services by listed companies and will be complementary to the OFT’s study of the supply of these services (the OFT inquiry was reported in a previous edition of UK Corporate Update available here).
The RIFI notes that although rights issues have been recognised to be a cost-effective method to raise additional equity capital, the costs of underwriting can be material. In addition the RIFI recognises that underwriting fees rose during the financial crisis, reflecting the additional risks faced by underwriters, but notes that although market conditions have improved the fees show no sign of falling.
The terms of reference of the RIFI are:
“To review the practices and procedures adopted when new capital is raised through the issue of equity securities to uphold the interests of companies, shareholders and markets, including:
- the role and selection of advisers and underwriters;
- how practice has evolved and is evolving in relation to the pricing and structure of capital raising;
- the level of underwriting fees relative to the changing exposure to risk and whether and if so how this has changed over time;
- the transparency in respect of the underwriting fees paid; and
- practices in relation to sub-underwriting, including the appointment of sub-underwriters and the sharing of risks and rewards between lead underwriters and sub-underwriters.
The consultation invites responses to both general and specific questions including:
- how has market practice changed since 1997?
- are there any outstanding legal or regulatory issues restricting the market’s capacity to underwrite capital raisings?
- how much control do listed companies have over deal structure (including decisions as to full scale rights issues, clawback issue or firm placing)?
Responses are invited by 6 August 2010 and it is anticipated that the final report and recommendations will be published by the end of the year.
Click here for the consultation paper.
