Lloyds Banking Group launched the biggest rights issue in British corporate history yesterday.

The bank is hoping for another £13.5 billion from its 2.8 million shareholders to avoid the need for costly state insurance of its bad debt. It hopes to raise this by selling 1.34 new shares to investors for every share that they already own priced at 37p.

The insurance scheme would have protected Lloyds against losses on its toxic assets but the price of that would be the Government lifting its stake in the lender. Since the Government owns 43 per cent of the bank and wants to maintain its stake at the same level, it will have to pay out £5.7 billion in the rights issue to do so.

The record UK rights issue, which eclipses the £12.5 billion raised by HSBC this year, was priced at a discount of 60 per cent to Monday’s closing price and 38 per cent to the theoretical ex-rights price. Those who do not contribute to the rights issue will see the value of their stake diluted by the new shares.

Share traders welcomed the terms of the issue, which was priced towards the top of the range after an earlier campaign to persuade investors to convert bonds to a new form of contingent capital raised a total of £9 billion in high-quality capital, £1.5 billion more than envisaged. Lloyds shares were marked 2.6 per cent higher to 93.92p.

The rights issue is the second and final stage of a total £22.5 billion fund-raising exercise in debt and shares which will allow Lloyds to avoid using the Government’s Asset Protection Scheme, the costly state-aided insurance of its bad debt. Lloyds’s capital-raising plans were overshadowed yesterday as it emerged that, at the height of the banking crisis last year, it concealed from its shareholders that HBOS, its prospective merger partner, had taken a secret £25.4 billion loan to stave off financial disaster.

Mervyn King, the Governor of the Bank of England, disclosed to MPs that when Lloyds and HBOS were seeking approval for their deal and £17 billion in new capital from their shareholders late last year, neither disclosed that HBOS had been forced to tap the Bank of England for the liquidity injection to stave off a crisis of confidence and possibly a run on the bank.

In capital-raisings, listed companies are bound by strict rules and required to disclose all relevant information. Directors guilty of issuing a false prospectus can face unlimited fines.

Although the Bank wanted the information kept secret to prevent depositor panic, officials believed that the decision on how to present the situation to shareholders was a matter entirely for the two banks themselves.

Last night Lloyds played down the omission, arguing that the money had been paid back to the Bank before the takeover was completed in January and saying that HBOS had made some disclosure. On page 224 of its prospectus in November 2008 it said that “in the current market conditions, central bank and government facilities are an important tool in the liquidity management solutions for banks, including HBOS”.

Some investors said that the omission was misleading and that such a vast amount of liquidity support should have been disclosed. One big institutional shareholder said that it might have been sensible for the two banks to disclose the level of support: “This will add fuel to the argument among certain Lloyds shareholders that they shouldn’t have had to pay a penny to acquire HBOS.”

On internet forums, small Lloyds shareholders, many of whom have long questioned the wisdom of the HBOS purchase, suggested that they had been “misled” by the omission. The Financial Services Authority (FSA) is already investigating whether HBOS misled its shareholders in this capital-raising and in another £4 billion capital-raising earlier last year.

• Investor appetite for government debt could be eroded if bank regulation is not reformed to remove an implicit state guarantee to large banks that undertake risky activities, Mervyn King, the Bank of England Governor, has said.

Giving evidence to the House of Lords Economics Committee, he stepped up his calls for a clear separation between banks that provide essential everyday financial services and those engaged in riskier activities.

While international agreement on bank reform was desirable, other Governments might not move with the urgency that Britain needed, Mr King said. “It would be a serious mistake for us to rely on the rest of the world solving this problem because, in the end, if we don’t . . . people who buy government bonds around the world will say the UK is a bit of a risk,” he said.

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