OFT study

The OFT published a report in January 2011 following its market study on the underwriting of equity capital raisings by listed companies. It conducted the market study because of company and institutional shareholder dissatisfaction with equity underwriting services. The dissatisfaction focused primarily on underwriting fees.

The report says that the OFT's findings indicate that there is little competitive tension between investment banks during the equity raising process and that companies raising equity capital are not focused principally on reducing underwriting fees. It also found that there had been a significant increase in fees since the start of the financial crisis and fees have not since fallen in line with the reduction in risk. However, the OFT has concluded (and confirmed in a May 2011 statement) that it is not appropriate to refer the equity underwriting market to the Competition Commission for investigation as the market has just been through an exceptional period following the credit crisis.  

The report contains several recommendations to help improve competition. For example, it suggests that companies should increase the number of banks they have relationships with (as banks which have an existing relationship with a company tend to be chosen to underwrite an equity capital raising) and that institutional shareholders should apply greater pressure on companies to reduce fees and discounts through, for example, discussion with the company about principles for any future equity raisings.

The OFT report is available on the OFT website.  

IIC guidance

The Institutional Investor Committee has published best practice guidance for issuers seeking to raise equity capital. The guidance, issued in May 2011, follows the Rights Issues Fees Inquiry Report published by the IIC in December 2010. In a similar conclusion to that of the OFT report, the IIC report found that there was a lack of competition in underwriting and that companies were unwilling to challenge banks, especially about the cost of underwriting.

The guidance is intended to inform issuers and their boards about institutional shareholders' views on best practice when raising equity capital.

As preparation for the eventuality that they may have to raise equity in the future, the guidance recommends that companies, amongst other things, discuss with their shareholders the appropriate capital structure for the company and whether in principle they have the ability or appetite to act as a sub-underwriter.  

Once the need for a capital raising exercise actually arises, the recommendations include that companies ask for a full breakdown of the advisers' proposed fees and satisfy themselves that they understand what it is being paid, and for what purpose, and in the event that the issue price is deeply discounted, consider whether the issue needs to be underwritten in whole, in part or not at all.  

The IIC guidance is available on the IIC website.