§ Mr. Grahamasked the Chancellor of the Exchequer if he intends to control the effect of rights issues on ordinary dividends when the shares are offered at a price far below the market value.
§ Mr. DellSeveral companies have used the deep discounting method in recent months when making a rights issue. Although the dividend increases received in these cases resulted in gross yields which were not out of line with those of other companies they have shown a way whereby the method could be abused to produce abnormally high yields through a rights issue.
A Treasury order made today prevents the amount of the dividend being raised, without a Treasury consent, in the same proportion as the increase in nominal capital by a rights issue where the consideration received in cash represents less than 75 per cent. of the market value of the existing shares on the day before the terms of the issue were announced to the Stock Exchange. Companies which wish to do this should, therefore, obtain Treasury consent for their announcement of a rights issue.
This measure should not be taken as a change in the Government's policy to encourage the raising of new capital for investment. The Treasury will continue to apply flexibly the rule allowing companies to forecast and declare a higher dividend when raising new capital for investment through a placing, rights issue, or offer for sale. The purpose of the new order is to ensure that the effect of a deep discounted issue on the dividend is not out of line with the minimum yield required by the market for a conventional rights issue to be successful.