UPDATE 2-RBS shareholders lukewarm on cash call, shares drop
* RBS considers up to 4 bln stg equity placing - source
* Bank says mulls partial alternative to issuing "B" shares
* Shares close down 5.2 percent, biggest FTSE 100 faller
(Adds statement from company, closing share price)
By Clara Ferreira-Marques and Raji Menon
LONDON, Sept 21 (Reuters) - Royal Bank of Scotland's (RBS.L) tentative plan for a cash call to trim the government's stake, potentially ahead of a move by rival Lloyds, met lukewarm support on Monday and its shares fell more than 5 percent.
A source familiar with the matter said on Sunday RBS chief executive Stephen Hester was gauging investor appetite for a share issue of up to 4 billion pounds ($6.5 billion), as the bank seeks to limit the increase in state ownership after a government-backed insurance scheme for bad debts is agreed.
RBS, which left investors nursing losses after a record 12 billion pound rights issue last year, said on Monday it was considering if there were "partial alternatives" to paying for a government insurance scheme by issuing "B" shares to the state.
Shareholders and analysts said they were surprised by the mooted move, which will do little to substantially alter the state's holding, currently at 70 percent.
But they said any step to take advantage of market conditions would have to be swift if RBS is to act before any decision by Lloyds Banking Group Plc (LLOY.L), which has said it is considering its own options around the insurance scheme.
RBS would also likely to want to move before the start of its "closed" period next month, ahead of results due in November. [ID:nLI109343]
"They certainly seem keen to do it. The rationale is that at some point an awful lot of these issues will come to the market and they are keen to make a start as early as possible," one top-25 RBS investor said.
"The tricky thing is that they are saying it's only a few billion pounds -- but that's quite a lot and it doesn't change the cosmetics of things very much at all. It's a bit of an aggravation to be perfectly honest.
"It doesn't feel like the kind of thing to me that people are going to be thrilled about," the investor added.
RBS shares closed down 5.2 percent at 53.4 pence, the weakest stock in the FTSE 100 .FTSE share index. They fell as low as 52.3p.
Analysts said RBS could look to an accelerated book build, which would be swifter and easier than a traditional share issue and could allow it to sidestep a full prospectus, if it raises no more than 10 percent of its issued share capital, or just over 3 billion pounds.
The British government has so far injected 20 billion pounds into RBS, taking a stake of around 70 percent.
That could rise, however, if the bank goes ahead with plans announced in February to participate in the government-backed Asset Protection Scheme (APS) to protect 325 billion pounds of assets.
As part of that plan it will take a further 19.5 billion pounds government cash injection -- which includes a 6.5 billion pound fee -- in exchange for non-voting "B" shares.
Converting those extra shares would raise the government's stake in RBS to over 80 percent.
RBS's mooted cash call could limit that increase to just over 70 percent. But analysts questioned the use of the move.
"Is 70 that different from 84? It is not going to keep the EU away, it is not going to stop government control -- it does not seem like it will make a great deal of difference," analyst Simon Maughan at MG Global said.
Lloyds last week confirmed after weeks of speculation that it may scale back or cancel its participation in the APS as a healthier economy improves the outlook for bad debts.
But analysts say RBS is not considering a full-scale exit. JP Morgan estimated in a note on Monday it would need to raise up to 28.5 billion pounds to sidestep the APS.
Ultimately, shareholders said, it would come down to the final terms of any capital increase.
"If the sums add up, in terms of it being less punitive and less dilutive and somewhat more earnings enhancing (than the current option),... then fine, we will look at it as much as we would for Lloyds," one top-15 investor said. (Editing by David Cowell and David Holmes) ($1 = 0.6116 pound)