Barclays snubbed the Government yesterday by offering up to a third of the high street bank to Middle Eastern investors as part of a £7.3 billion capital raising.

The bank said that it preferred to retain its “right to self-determination” by taking on foreign investors rather than participating in the offer of capital from the Treasury, which would have seen a government representative join the board. Barclays was immediately accused of structuring the cash call so that it could continue paying its executives big bonuses without government interference.

Sheikh Mansour Bin Zayed Al Nahyan, the owner of Manchester City and a member of the Abu Dhabi Royal Family, will prop up Barclays with £3.5 billion, giving him the option to take a 16.3 per cent stake in the bank.

The terms of the capital raising will also increase the Qatar Investment Authority’s (QIA) share in Barclays from 6.2 per cent to up to 12.7 per cent at a cost of £2 billion. Challenger, an offshore vehicle set up by Sheikh Hamad Bin Jassim Bin Jabr Al-Thani, the Qatari Prime Minister, will increase its stake from 1.9 per cent to as much as 2.8 per cent, for £300 million.

Barclays is understood to have approached existing shareholders China Development Bank, Sumitomo Mitsui Banking Corporation and Temasek, as well as other Russian, Asian and Middle Eastern investors in a desperate bid to raise cash, but was turned down. Barclays then backtracked on plans announced three weeks ago to issue preference and ordinary shares, in favour of more generous terms for investors.

Retail shareholders, however, will be shut out of the capital raising, diluting their investments in the bank. Institutional investors were yesterday offered £1.5 billion worth of convertible notes which must be swapped into shares by the middle of next year.

The bank said this month that it would not join HBOS, Lloyds TSB and RBS in selling the Government preference shares with a 12 per cent coupon.

John Varley, Barclays’ chief executive, said that having taxpayers as shareholders would have robbed the bank of its ability to set its own strategy, while a traditional capital raising would have exposed its share price to dangerous volatility. Barclays wants stronger ties to the Middle East as the West goes into recession, he added.

With a government representative on the board, Barclays may also have struggled to rationalise the multimillion-pound bonuses paid to top executives such as Bob Diamond, the bank’s president, who last year took home £21 million in cash and shares.

The Government and the financial regulator have promised to crack down on big payouts at banks that are struggling to get through the financial crisis. A rival banker said: “They’ve put their own personal position above the interests of their shareholders. This is called feather-bedding.” But Marcus Agius, Barclays’ chairman, said: “It’s to do with self-determination and the ability to decide our own destiny.”

Under the terms of the deal, Barclays will issue £3 billion worth of tax-deductible securities called reserve capital instruments (RCIs) paying a coupon of 14 per cent, as well as £3 billion in five-year warrants. Sheikh Mansour and the QIA will be able to use the warrants to buy Barclays stock at 198p per share. Yesterday the shares closed at 178.9p, down 12.8 per cent.

The bank will also issue £4.3 billion worth of mandatorily convertible notes (MCNs) - £1.5 billion of which were offered to institutions. The MCNs pay 9.75 per cent and must be converted to shares by June 30 next year at a cost of 153p per share.

Barclays insisted that the capital raising was no more expensive than selling the Government preference shares. Mr Varley said that tax breaks on the RCIs, plus the cost of the associated warrants, would reduce the annual cost to about 13 per cent.

Analysts, however, derided Barclays’ calculation of the cost of the warrants. They said that the Government would have allowed Barclays to redeem their preference shares within a few years, whereas Barclays has promised to pay a higher coupon on the RCIs for at least ten years. “Thirteen per cent for ten years is more than 12 per cent for two years however you look at it,” an analyst said.

The capital raising will cost £300 million, including payments to the Middle Eastern investors for negotiating the deal.

Herbert “Bart” McDade III, Lehman Brothers’ president when it collapsed, has left Barclays Capital, which bought the failed investment bank’s US capital markets business. Mr McDade was among the senior executives involved in talks to try to save Lehman Brothers.

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