The Government was looking at a £3 billion theoretical loss on its latest bank investments after the Lloyds TSB and HBOS share offers formally flopped yesterday, leaving it to write a cheque for £17 billion.

Existing shareholders bought only 13.1 million new Lloyds shares and 17.7 million new HBOS shares, leaving 99.5 per cent and 99.76 per cent of the two respective share offerings with the underwriter – the Government.

Shareholders largely shunned the offerings because the prevailing market prices of the two banks were considerably lower than the offer prices throughout the offer period. However, it appears that tens of thousands of small investors still applied, paying much higher prices for the new shares than they need have done.

HBOS declined to say how many of its shareholders applied for new shares, but, based on the average shareholder owning 400 shares, around 32,000 people may have applied and so paid over the market rate for their shares.

HBOS, which has two million private shareholders, many of them share market novices, said that it had made it “very clear” that the market price could be below the offer price and had advised people to seek independent financial advice.

Lloyds and HBOS shares rose strongly yesterday, to 140.7p and 84.1p respectively, but stand well below the 173.3p and 113.6p that the Government paid for its new shares. The Government is also sitting on a £2.4 billion paper loss on its 58 per cent stake in Royal Bank of Scotland.

The Court of Session in Edinburgh yesterday approved the scheme of arrangement under which Lloyds will buy HBOS in an all-share takeover. The Government will own 43 per cent of the combined bank, to be called Lloyds Banking Group. HBOS’s listing will be cancelled tomorrow and all HBOS shareholders will be issued with new Lloyds shares automatically.

Rights issues by listed companies are to be further speeded up under new proposals from the Financial Services Authority, which said yesterday that the minimum subscription period should be reduced by a week to 14 calendar days or ten business days. The reform comes after a move a week ago by institutional investors to waive their right to veto all but the largest capital raisings.

The authorities are anxious to speed up rights issues, which can take months and leave companies vulnerable to bear raids and market manipulators.

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