New shares
Sir: Christopher Fildes, with whom I do not normally reckon to have to take issue, is very well aware both of the merits and of the mechanism of rights issues. His article in your 2 May issue (City and Suburban), however, succeeds in giving the opposite impression.
The idea that institutions favour rights issues because they get 'cheap shares' derives from an ancient but persistent heresy. The fact is that for institutions which are already shareholders (and it is surely such institutions which we are con- sidering) the reduced price of the new shares offered to them in a rights issue will be compensated by a fall in the value of the shares they already hold; this is another way of stating the obvious truth that the owners of a company cannot advantage themselves by issuing more pieces of pap- er. If, however, the company offers new shares to outsiders at a discount, those outsiders do indeed benefit, and at the expense of the existing holders; and private investors among such holders should be grateful to the institutional investment protection committees for taking, on their behalf, the very stand which Christopher Fildes appears to deplore.
All this is not to say that an external placing is never to be preferred to a rights issue. It depends upon the relative costs; and those of a rights issue may, of course, be swollen by underwriting expenses, from which institutions can indeed profit but which can usually be avoided by the simple expedient of a deep discount. But the rights issue is beyond question the method of raising fresh capital which is best de- signed to protect the shareholder, and the onus must always therefore be on the directors to show that some alternative method is more economical.
City institutions have been much criti- cised (by me among others) for their reluctance to take a firm stand on defence of shareholders. In this instance their investment protection committees are trying to do something of the sort, and if the Office of Fair Trading takes issue with them it will have been seriously misled.
Edgar Palamountain Juxon House,
94 St Paul's Churchyard, London EC4
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