The rights issue the bank undertook in May 2008 raised £12bn and shareholders believe it was promoted on a misleading basis. Hence it is likely to be the focus of any legal action on behalf of shareholders. The following analysis is a cursory overview of some of the issues and is not meant to be either an exhaustive analysis of the prospectus or of the basis for any legal case that may be pursued. The letter from the Chairman of RBS at the time, Sir Tom McKillop, and dated 25th April 2008 includes the following comments about the prospective rights issue: "Overall underlying performance of the Group remained satisfactory with the principal exception of a slowdown in capital markets activity in Global Banking & Markets"; and "Following the rights issue, RBS believes that it will be in a strong position to realise the substantial value in its UK and international franchises and to take advantage of the growth opportunities available to it". Would not anyone reading that consider these comments to be both positive and optimistic about the future prospects for the company? Although it refers to write-downs in respect of credit market exposures of £4.3bn (net of tax), it also indicates that after taking into account planned disposals, the capital ratios would increase substantially suggesting that the balance sheet strength would be significantly improved. Capital Write-Downs The write-downs for credit market exposures of £4.3bn (£5.9bn gross) are explained in more detail on page 26 of the prospectus and include estimates of the likely write-downs for the whole of 2008. On that page it says "These estimates are based on what the Board considers to be prudent assumptions reflecting the further sharp deterioration in market conditions and outlook in credit markets at this point". In reality the actual figure from the 2008 Annual Report turned out to be £7.8bn for credit market exposures plus credit impairment losses of £7.0bn - in addition there was an impairment charge of £16.2bn of which 47% related to ABN-AMRO and its assets. Clearly the Board's forecasts of the outcome for the year, when they were already 4 months into the year, were wildly wrong. ABN-AMRO It was made clear at the 2009 AGM that the ABN-AMRO acquisition was a big mistake and a lot of the write downs were related to the toxic assets acquired as part of that deal. However in April 2008 the Chairman simply reported that ABN-AMRO integration synergies were on plan, with no hint of the problems that were subsequently to become apparent. Page 29 of the prospectus covers this in more detail, and there is no mention of any problems. Dividends Page 27 of the prospectus covers the likely future dividend policy, which is usually an important factor for shareholders when evaluating a new investment in the shares of a company. It suggests there will be a similar payout ratio going forward, although it warns that the additional capital raised may not generate the same returns as existing capital so that some reduction is likely. But in general it suggests that the dividend is sustainable when in reality it has turned out to be otherwise. Current Trading and Prospects Current trading and prospects are covered on page 29 of the prospectus and there is no hint of any major problems looming. For example it states "overall credit risk metrics have remained stable in the first quarter, with a continued decline in UK personal sector impairment losses but increased delinquencies in a specific US retail portfolio. Corporate credit quality remains broadly stable". Working Capital Page 22 of the prospectus states "The Company is of the opinion that, after taking into account existing available bank and other facilities and the net proceeds of the Rights Issue, the Group has sufficient working capital for its present requirements, that is, for at least the next 12 months from the date of this document", i.e. from April 2008. How wrong can you be? By December 2008 Alistair Darling even said on BBC TV's Panorama programme that RBS "needed an awful lot of money" after the forced "recapitalisation" of RBS and other banks. The full prospectus issued in April 2008 is available from this page of the RBS web site: www.investors.rbs.com/rights_issue - you need to select your country location and then go to the Documentation tab on the following page for the actual prospectus document (note: if the link does not work then please let us know as RBS seem to move the item sometimes). In summary, although there are of course a number of "risk warnings" as in any prospectus, and the directors might attempt to claim that the general situation in financial markets changed after the collapse of Lehman's, in essence it was probably not a prudent document as a whole, and shareholders, particularly those who were not familiar with the risks associated with some of the assets in RBS, or the known problems in financial markets, may well have interpreted the prospectus in a more positive fashion than was warranted.