Bradford & Bingley was under fire from institutional investors last night for selling a cut-price 23 per cent stake in itself to the American private equity investor TPG Capital without offering existing shareholders first refusal.

Small investors attacked the bank too after it scrapped its original £300 million rights issue, releasing the underwriters from a promise that would have saved shareholders £59 million based on yesterday's closing price. Instead, B&B announced plans to sell £179 million of new shares to TPG and to replace the 82p a share rights issue with a more steeply discounted 55p issue raising £258 million.

The sale of a significant stake to TPG appears to breach one of the most basic tenets of City life - pre-emption rights, the rule that existing shareholders should be given first option in any major equity restructuring.

Peter Montagnon, director of investment affairs at the Association of British Insurers, which represents institutional shareholders, said: “On the surface this is a pretty serious breach of the pre-emption rights principle. But the circumstances are complicated. We need to understand what has happened and it would be wrong to jump to conclusions.”

Listed companies generally can issue large amounts of equity to new investors only if they have been refused by existing shareholders, or if the new equity is priced at no more than a 5 per cent discount to the prevailing price. TPG is gaining an influential stake in B&B at a large discount and has won other concessions, including the right to appoint two directors.

Rod Kent, chairman of B&B, said the restructuring was needed because of deteriorating conditions in the mortgage market, which made it necessary to seek additional capital. He said TPG would bring credibility and new skills to B&B, which is Britain's biggest lender to buy-to-let landlords and borrowers with non-standard credit histories.

Explaining the profits warning issued yesterday, Mr Kent said the latest problem of worsening arrears had not come to light when the bank announced the capital-raising on May 14 because the board was reliant on management accounts that were six weeks old. He took responsibility for these failings, adding: “I'm determined to improve our management game.” Mr Kent has taken over as executive chairman after Steve Crawshaw, chief executive, stepped down at the weekend because of a heart complaint.

The ABI is seeking an explanation of why B&B did not hold the underwriters, Citigroup and UBS, to the original terms, which would have forced them to buy all the unwanted shares in the original rights issue at 82p, and has criticised the company for its poor relations with shareholders. “There is an unfortunate history of poor communications at B&B,” Mr Montagnon said, a reference to B&B's decision to launch a rights issue a month after it explicitly ruled one out.

The UK Shareholders Association, which represents small private investors, said that it was going to complain to the Financial Services Authority that B&B's denial was misleading.

B&B, which demutualised in 2000, has 970,000 small shareholders. They should ignore the circular sent out two weeks ago and await a new letter. Shareholders will be offered 19 new shares for every 25 they own. Most investors with 250 shares from the demutualisation will have the option to buy 190 more at 55p for £104.50. The shares fell 24 per cent to 67p yesterday.

The path to the present

— A former building society formed in 1964 from the merger of the Bradford Equitable Building Society and the Bingley Building Society, Bradford & Bingley demutualised in July 2000 and listed on the stock exchange in December that year at 247p per share

— About 40 per cent of the bank's shares are held by retail investors, many having held the stock since the demutualisation

— More than 960,000 people hold less than 1,000 shares, making them the largest block of investors

— B&B has transformed itself into a specialist mortgage bank and, with 20 per cent of the market, is Britain’s largest buy-to-let lender, providing loans to landlords and property investors. It also provides self-certification mortgages, or loans for the self-employed and those with more than one job

— At its peak in March 2006, B&B was worth £3.3 billion. The shares have since tumbled, losing 76 per cent of their value since the start of this year. At present prices, the lender is worth about £400 million

— The bank has been under pressure since May, when it announced plans for a bumper £300 million emergency rights issue, a month after denying that it had any plans to do so. B&B said at the time that it had waited for markets to stabilise before going ahead with the deeply discounted issue

— B&B has almost 200 branches. It has total assets of £52 billion as of December 2007, of which almost half is made up of buy-to-let mortgages, while 16 per cent is self-certification

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