Two questions for Royal Bank of Scotland about its much-leaked record share issue: why pay the final dividend, and why underwrite the rights? They are questions that should concern any finance director planning to raise capital this way.

First the dividend. Normally the argument is that the dividend must be maintained to encourage investors to buy the new shares. But why pay cash to shareholders so that they can pay tax on it and then ask them to pay the money back to the company?

The terms of the issue can easily be structured to eliminate the dividend. This blog is being written before the annual meeting at which the bank will announce the rights and ask for a vote on the dividend so the figures are hypothetical.

But let’s say Royal Bank makes a 1-for-2 issue at about £2 – roughly half the current share price – to raise £10bn (most of which will fill the newly revealed hole in reserves while the rest boosts ratios). The company is proposing a 23.1p final dividend, so instead of paying 46p on two shares it could reduce the rights price by 46p.

On that basis it could make a 1-for-3 issue at 300p, which - less three dividends - would reduce to 230p, which would be a 40 per cent discount.

The bank’s capital would be unchanged (revenue reserves gain relative to the share premium account, but that is good for future dividend payments). Investors would save up to 9p a share tax however, and those shareholders who need cashflow could sell part of their rights, potentially using capital gain tax allowances rather than incurring income tax.

If RBS is worried about its unblemished dividend record, an asterisk on the bar chart will explain all. If it wants to make a scrip dividend instead (a purely mathematical sleight of hand) fair enough, though issuing free shares, cheap shares and cancelling the cash payment is probably a complexity too far.

But politically, telling the world that investors’ are forgoing a dividend would satisfy those who rightly think shareholders should feel the pain if the Bank of England is bailing out banks with new facilities.

Next the underwriting. Why? If the rights issue is to be at a deep discount it will be so attractive it does not require the City to guarantee its take up – especially when those banks will charge a fee of around £200m and some of the investment banks advising RBS are the same ones who advised it on last year’s overpriced takeover of ABN Amro.

Even in its hour of financial need, Royal Bank is looking after its own. A deep discount is instead of underwriting, not as well.

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