Lloyds TSB cut the terms of its controversial takeover of HBOS, the owner of the Halifax, yesterday after the two lenders asked the Government for a combined capital injection of £17 billion.

The cash calls mean that the British taxpayer will end up with a stake of as much as 43.5 per cent in the combined bank, which, once completed, will dominate the market for mortgage loans and high street lending.

As part of the price of the Government’s commitment yesterday, HBOS said that it would scrap cash bonuses this year. Andy Hornby, the chief executive, and Dennis Stevenson, the chairman, will leave after the takeover is completed. Both have waived their rights to salary and bonus payouts, HBOS said. Mr Hornby was entitled to about £2 million.

Lloyds TSB, led by its American chief executive Eric Daniels, said that it would ask executives to take their bonuses in shares this year. It said that the remuneration policy at the merged group would prioritise long-term value and would not pay out “rewards for failure”.

Lloyds TSB cut 27 per cent off the value of its offer, blaming “unprecedented turbulence in global financial markets”. It said that it could no longer recommend the deal to shareholders in its previously agreed form.

The all-share proposal to merge the two banks, brokered by the Treasury amid fears that HBOS was nearing collapse, has been buffeted by sliding stock markets since it was unveiled last month. Despite persistent reassurances by Lloyds that it was committed to the takeover, HBOS shares have traded at a discount of as much as 50 per cent of the offer price, prompting fears of a rebellion among investors. HBOS shareholders will now receive 0.605 Lloyds TSB shares for each of their existing shares, compared with 0.83 of a share previously.

Yesterday, shares in both banks slumped. HBOS fell by more than 27.5 per cent, closing 34.2p down at 90p, while Lloyds TSB fell 27.4p, or 14.5 per cent, to 162p. The falls cut the discount in HBOS shares to less than 9 per cent.

HBOS, which is asking for £11.5 billion through a combination of ordinary and preference shares, will place about £8.5 billion of ordinary shares with the Government at 113.6p, an 8.5 per cent discount to the bank’s closing price on Friday. It will also issue the Government with £3 billion of preference shares, which pay an annual interest rate of 12 per cent.

Lloyds TSB will raise about £5.5 billion, consisting of £4.5 billion in ordinary shares and £1 billion of preference shares. The ordinary shares will be sold for 173.3p each, also an 8.5 per cent discount to Friday’s closing price. No dividends will be paid until the preference shares are paid off in full. Analysts at Cazenove speculated that this could take several years.

HBOS admitted that it had been hit by a further downturn in the credit markets. Lloyds TSB said that it had been trading well in the second half.

Lloyds TSB

— Lloyds TSB to raise £5.5 billion and cut HBOS offer by 27 per cent to 0.605p a share. HBOS to raise £11.5 billion

— If no institutional shareholders subscribe, the Government will own 43.5 per cent of the merged bank

— Lloyds shares issued at 173.3p, HBOS at 113.6p, an 8.5 per cent discount to Friday’s close

— HBOS chairman and chief executive to leave post-merger

Times Recommends

• Minister in talks with Saudis to protect creditors
• Premier Inn hits back in £29-a-room row
• Bankers hit back at 'populist' bonus supertax