Lloyds Banking Group investors on Thursday overwhelmingly approved the bank's record rights issue but gave executives a grilling for mistakes made during the financial crisis.

Lloyds also said at a meeting of shareholders that it had a modest exposure to Dubai World, a company at the center of worries about debt problems in Dubai, but said it did not represent a material threat to the bank or shareholders. Lloyds and other European bank stocks were hit on Thursday by investor concerns about loan exposure to Dubai.

Lloyds said 99.75 percent of shareholders approved the rights issue in an unofficial tally announced at the meeting.

Lloyds, which has more investors than any other British company after its takeover of HBOS in January, is seeking approval to raise 13.5 billion pounds ($22.5 billion) to escape costly state support.

The shareholder meeting comes just two days after the Bank of England said it secretly lent HBOS and Royal Bank of Scotland almost 62 billion pounds as the crisis raged last year.

My feeling is we've got to go along with (the rights issue), said Ralph Newnes, a shareholder from Birmingham. If we remain in the government scheme, it is even worse.

Newnes said his support would come with mixed feelings. With the press coverage they have had and with what they have said about secret loans, there are a lot of questions that need answering, he said.

Lloyds this month said it wanted to sidestep a government-backed insurance scheme for toxic loans and would instead turn to investors to raise a total of 22.5 billion pounds to repair a balance sheet badly depleted by the HBOS deal.

Crucially, with your approval and capital markets support (this opportunity) will allow us to shape our own future, Lloyds Chairman Win Bischoff told shareholders at the meeting.

Approving the rights issue is a more attractive option that the government insurance scheme and Britain's economy has begun to stabilize, he said.

In short, based on the trading performance in the year to date, we are confident we can deliver further improvements in 2010 and 2011, Bischoff said.

Britain's largest retail lender has already secured the backing of its largest shareholder -- the UK government with just over 43 percent -- but could face anger from its legion of small shareholders, many of whom are expected to flock to the central English city of Birmingham on Thursday.

Lloyds has 2.8 million small investors and many of those who gather at Birmingham's NEC arena, more frequently host to sporting and music events, will already have been tapped for cash in the past 18 months.

Lloyds asked shareholders for 4 billion pounds earlier this year, and beleaguered HBOS scrambled together a separate 4 billion last year in one of the biggest fund-raising flops in UK corporate history.

In addition to the rights issue Lloyds is raising 9 billion pounds from a debt exchange.

The rights issue was priced earlier this week at 37 pence per share, at the higher end of the expected range, with investors being offered 1.34 shares for every existing share held.

That price represents a 38.6 percent discount to the theoretical ex-rights price -- a far steeper discount than that offered by peers including Societe Generale -- and compares to a current market price of around 94p.

Analysts say a positive vote on Thursday will remove a final cloud of uncertainty hanging over Lloyds after months of debate over EU competition authorities and toxic loans.

($1=.5996 pounds)

(Editing by Elaine Hardcastle and Andrew Callus)

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