The RBS (LON:RBS) shareholders threatening to sue their former directors and advisers over last year’s rights issue have a point. If the board knew the bank’s problems they were fraudulent in seeking new capital and if they didn’t, they should.

RBS has offered investors a lot of paper since last year but the problem is the £12bn rights issue announced in April 2008. The credit crunch was already eight months old and the bank’s share price had fallen from 700p to 370p. The 11-for-18 offer was priced at 200p – a 46 per cent discount to the market price – and accompanied by bullish statements from the board. Some 95 per cent of RBS shareholders took up the issue.

With the bank’s price down to 71.5p by October 2008 subscription had clearly been a bad decision, so when RBS announced a further £15bn share issue at 65.5p (a mere 8.5 per cent discount) disgruntled shareholders left it with the government underwriter. Just 0.25 per cent of investors accepted the 18-for-13 issue.

And when the bank returned for yet more in January 2009, seeking £5bn at 31.75p a share – the same 8.5 per cent discount again – holders of just 0.7 per cent of the shares accepted, again leaving them with the government underwriter.

Despite the directors’ bullish comments that accompanied the original rights issue RBS subsequently reported £7.4bn of write-offs for the year and a £8.3bn loss, then followed with a further £7.5bn of provisions for the first half of 2009. That’s the hole the share issues had to fill.

RBS’s shares are now 48p, so with hindsight, investors were clearly wrong to pay 200p a share in that first issue and right to reject paying 65.5p last autumn. But they were wrong to reject January’s share offer at 31.75p.

Interestingly, the other troubled Scottish bank, HBoS, held a £4bn rights issue simultaneous to RBS’s original offer and at a similar discount, but while 95 per cent of Royal’s shareholders accepted, 92 per cent of HBoS’s rejected.

The RBS investors who took up their bank’s rights have lost £9bn of the £12bn they subscribed, but suing will be a challenge. There is no point suing the bank because they would be compensated from their own money; there is no point suing former chief executive Sir Fred Goodwin and his board because they don’t have that sort of money. And suing the City advisers would be pitching small shareholders against mighty institutions with the resources to fight to the end.

The small investors should remember that whether or not they were misled about the state of RBS’s finances in early 2008, the bank would have had to report those losses whether or not they subscribed new capital. And if the bank had revealed its plight it could never have raised capital on those terms, leaving it in an even worse state than it is in now.

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