THE Norwich Union's announcement this week that it is offering its members the opportunity to buy extra shares at a 25p discount on the June 16th flotation price, could result in one of the biggest scrambles for shares by private investors here. Up to 5 per cent of the population is understood to hold a Norwich Union policy.
Many readers have contacted Family Money with queries about the flotation. Mr B from Limerick is thinking of investing £20,000 and wonders -"if the prospects of making a profit are sound?" He also wants to know "if there is any danger to my money?"
Ms N from Dublin says that she doesn't have much spare cash, "but I am in a position at the moment to borrow some money from the bank to buy discounted shares. Would this make sense, given that interest rates have gone up?" Mr D from Cashel, meanwhile, is concerned about the tax implications of his windfall. "Is the taxman going to charge me income tax on the 450 free shares
I have both a mortgage protection policy and a pension with Norwich. What happens if I sell the shares?"
The most common question has been Mr B's - are the profit prospects for this latest privatisation good, and how much of a risk does it pose?
The share price has not yet been announced - it could be decided on the day before flotation but analysts are confident that the 1.3 billion free shares being allocated and set to trade on June 16th will rise steadily above the expected issue price of between 240p and 290p. The markets are also rife with rumours about international insurance companies preparing to make hostile takeover bids for Norwich plc, and how they will probably have to offer at least a 25 per cent premium to get share-holders - all 2.9 million in Britain and here - to agree to such a bid.
Combine this with the fact that the numbers of shares available to institutional buyers are restricted by the large numbers of private shareholders and the instant profit prospect looks very good indeed for anyone with an allocation of free shares.
Next to Ms N's question: should someone borrow money to buy discount shares? It is correct that interest rates have risen by a half a percentage point in recent weeks, bringing the average personal borrowing rate to APR 11.5-12 per cent. But many commentators have also made that point that if we are to join the European Monetary Union at the end of 1999, our interest rates are going to have to match the German ones by that date: German rates are currently 3 per cent lower than ours and while their rates might rise closer to our values, it is more likely that ours will have to come down. The cost of a three-year loan might be lower over the period than the initial borrowing rate.
What you also have to consider - assuming of course that the flotation is not a complete flop - is that you will earn an instant profit because of your free share allocation. The 10 per cent discount on your first purchase of shares and the expected rise in the share price from any hostile takeover bid, potentially increase their value by a factor of two or three. In the case of the Irish Permanent flotation three years ago the opening price of 180p increased steadily to its current value of £6.50 Anyone with a modest 300 free shares then has seen their value rise from £540 to nearly £2,000 in the space of just a few years.
On condition that you can absolutely afford the monthly bank repayments, borrowing to buy these shares could prove a wise move; after all, if you absolutely have to, you can always sell the stock to repay the loan. (Don't be too surprised, especially if the loan is a large one, if the bank manager asks for the share certificate as collateral.)
The tax situation is straight-forward. According to a spokesman for Norwich Union the free shares will not be liable for any income tax, but the Revenue is treating them as if they were purchased for zero pence. What this means is that if, for example, your shares were worth £500 and you sold them a year later when they were valued at £750 (a profit of £250) you will be liable to Capital Gains Tax on the entire £750.
CGT is charged at 40 per cent, so the taxman's gain is £300. However, if you decide to sell any of the discount price shares you purchased after the flotation, you would only pay CGT on the profit you earned plus 10 per cent. Inadequate as it is, the CGT allowance of £1,000 for an individual and £2,000 for a married couple will easily absorb the CGT payable on this example.
Special broker rates for share-holders who decide to sell their shares are being arranged by Norwich Union. Instead of the usual 1.5 or 2 per cent commission, a flat fee is expected to be set for the service. Other brokers are expected to set their own flat fees as well since they will all be under pressure by their institutional clients to find them shares.
Anyone with urgent queries about their Norwich Union membership or free and discount share allocation should contact the company on the following helpline number - 1 850 334444. If you are calling from outside Ireland the number is 44 541 501020.
