Fury grows in the City at mounting bank charges

Bankers are exacting increasingly large fees to underwrite the deals, claiming that there is a higher level of risk that the sales won't attract enough investors.

If not enough sign up, the banks are left holding millions of pounds' worth of shares which they do not want.

But most recent fundraisers have been for companies that are doing well and seeking cash to expand on the advice of investors, rather than for crisis-torn firms whose offers investors might have shunned.

Yet the banks are still charging up to 6% of the amount raised compared with the 2% they historically invoiced. That means large chunks of investors' money are going to investment banks rather than into the companies.

Industry figures show that UK listed businesses have raised around £40 billion this year, with the banks taking fees totalling about £1.5 billion.

Some companies are being forced into expensive rights issues because banking facilities such as overdrafts are becoming more expensive.

Yesterday industrial group GKN launched a deeply discounted £423 million fund raiser, which cost £20 million — almost 5% — in fees.

It decided that this was cheaper than trying to renegotiate a £350 million overdraft. "The terms being asked for by the banks on the credit facility were extremely onerous," said a spokesman. "The cost of refinancing was not in shareholders' interests."

Although chief executives are reluctant to openly criticise powerful bankers whose support they may need in future takeover battles, in private some are fuming.

One adviser to a company involved in a recent fundraiser, said: "Seventy per cent of what they charged was for underwriting. But the shares were placed at a huge discount on the bank's advice. So they flew. I can't see that there was any risk the offer wouldn't be subscribed."

The most successful bank for securing fundraisers seems to be JP Morgan Cazenove, led by Naguib Kheraj, although Morgan Stanley, Citigroup and UBS have also done extremely well this year. Cazenove refused to comment on the record or give a justification for the fees it is charging.

One chief executive complained about the large number of advisers who attach themselves to straightforward deals. And some in the City are arguing that the investment-banking sector is less competitive than it has been for decades, with not much variation in price and persistent moves to push the going rate up for arranging deals.

Banks and companies have lately made it harder to work out what fees are being paid, either by burying the figures in lengthy prospectuses or flatly refusing to disclose the amount until some future date. Sainsbury's yesterday refused to reveal what it had to pay for its £432 million fund raiser. But given its good performance and that, according to chief executive Justin King, shareholders advocated the expansion plan, observers say its stock and bond issue must have been a simple matter.

One banker denied that his firm is overcharging: "It may look easy but it isn't. It's not so long ago that we were getting stuck with stock we couldn't place. It only takes one of these deals to go wrong, and suddenly you'll see that we are taking risks."