RBS Share Buy-Back

The Royal Bank of Scotland (RBS) is proposing to buy-back up to 4.99% of its shares from the stake held by the Government (by UKFI on its behalf). At present the Government holds 62% of the company stemming from the bailout in the banking crisis ten years ago. They have been trying to get shot of it ever since as no Tory government thinks it should be investing in banks. This latest proposal makes it clear that UKFI cannot easily sell the shares in the market, nor place them with institutions, perhaps because there are still outstanding lawsuits faced by the company.

Should shareholders support this proposal? I don’t think so, and I will be voting against it with the few shares I hold which were acquired to support the ShareSoc campaign for the appointment of a Shareholder Committee. Incidentally this proposal rather suggests that it is now even more important to have such a Committee because this proposal may be of advantage to the Government but it is not at all clear whether it is of benefit to shareholders as a whole.

Fortunately UKFI won’t be able to vote their shares at the EGM to approve the proposed buy-back so other shareholders will decide the issue.

Other shareholders might wish to ask themselves, why should shares only be bought back from UKFI and not all shareholders, e.g. via a tender offer. Another negative is that this share buy-back is effectively a reduction in capital when banks like RBS still have a relatively thin equity capital base. In any case, I generally vote against buy-backs other than in investment trusts. They are usually misconceived. The Government commissioned research into share buy-backs a year ago on the grounds that they may be being used to inflate executive pay (reducing the number of shares in issue increases earnings per share which is a common element in executive pay bonus and LTIP schemes). The research has yet to produce a report.

Personally I would like to see share buy-backs made illegal except in very limited circumstances, as they used to be. They are rarely of benefit to other shareholders and can be used by foolish management to try to manage the share price.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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