MORE than 2m shareholders in Halifax Bank of Scotland were offered the chance to buy more shares in the group last week when it began a £4 billion rights issue.

It followed a move by Royal Bank of Scotland (RBS), which announced a £12 billion rights issue at the end of last month to raise fresh capital as a result of the credit crunch.

Here we explain what is going on.

What is a rights issue?

A rights issue allows companies to raise additional capital by offering new shares to existing shareholders at a discounted price.

Why is HBOS doing this?

HBOS has announced a £2.8billion write-down of its assets because of the global credit crunch and is under pressure to increase bank funding.

The rights issue provides the group with more money at a time when financial firms are wary of lending to each other.

How many shares am I entitled to?

The group is offering 40 new shares for every 100. So to work out how many new shares you will be entitled to buy, you need to multiply your present shareholding by two and divide by five.

For example, if you have 100 shares, you will be entitled to buy 40 new shares at the discounted price of 275p, which is a 45% discount on the 495.5p price of shares at the close on Friday. This would cost a total of £110.

If you decide to buy the new shares, the proportion of the company you will own will remain the same as it was before the rights issue.

What if I don't want to take up any more shares?

If you decide not to buy new shares, you can sell your entitlement. This is because all qualifying shareholders will be allocated what are called “nil paid rights” - an instrument that gives you the right to buy new shares at the discounted price if you want to.

These “rights” have a market value. The price you will receive for them depends on the market conditions.

In this example, while the number of shares you own in HBOS will stay the same, the proportion of the company you own will be slightly lower than it was before the rights issue.

What will happen to the value of the shares?

When the new shares are issued the price of the existing shares moves down to adjust for the rights issue. The value of HBOS shares have fallen by about 18p since the rights issue was announced last Tuesday.

What are the prospects for HBOS shares?

Market analysts are sceptical of HBOS share performance.

Richard Hunter, of the stockbroking arm of Hargreaves Lansdown, said: “The general market view on HBOS shares is that it's a weak hold. The concern is that even though they have said they would raise some of this money to grow their international business, the fact remains that HBOS is very UK centric. RBS, on the other hand, has more worldwide interests and for that reason I think it will be the preferred of the two.”

However, Gavin Oldham at The Share Centre said if shares were not taken up, you would risk reducing the value of your holdings. “If you don't take up the shares, you will allow the rights you have to be seriously diluted at exactly the wrong share price,” he said.

What happens next?

HBOS will publish a full prospectus for qualifying shareholders in late June. This will give details of the options that are available to qualifying shareholders and outline the timetable for the rest of the process.

Approval will be sought at an extraordinary meeting in late June. It is expected that the rights issue will be completed in late July.

Further information on the rights issue and how it affects you can be obtained from the website, HBOSplc.com .

Alternatively, you can call the shareholder helpline on 0870 702 0102.

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