(Reuters) - Lloyds Banking Group is joining a class-action lawsuit against government-owned Royal Bank of Scotland, seeking 420 million pounds ($709 million) over the bank's handling of its 12-billion-pound rights issue, the Herald Scotland newspaper reported.

The Scottish daily said on Wednesday that Lloyds is suing RBS through nine of its pensions and investment management subsidiaries along with 40,000 individual and institutional investors already seeking redress from RBS.

Hundreds of investors had previously joined an unprecedented group legal action against RBS, alleging they were misled during an emergency cash call in 2008, and claiming damages of about 4 billion pounds ($6.7 billion).

RBoS Action Group, which represents the largest group of shareholders, last week filed claims and said it would lodge more this week.

"The management in the relevant insurance businesses gave careful consideration as to whether it was in the interests of policyholders to join the legal proceedings and decided it was in their best interests," the Herald Scotland cited a spokesman for Lloyds insurance arm, Scottish Widows, as saying.

The newspaper counted Lloyds entities that filed papers to sue RBS earlier this week as Scottish Widows Plc, Scottish Widows Unit Fund Ltd, Pensions Management Ltd, Scottish Widows Unit Trust Managers Ltd, Clerical Medical Investments Group, Halifax Life, Clerical Medical Management Fund Ltd, HBOS Investment Fund Managers Ltd and St Andrews Life Assurance.

May 15 marked the six-year anniversary of when the shares RBS sold in its emergency rights issue began trading and could be the cut-off point under British law after which damage claims can no longer be accepted.

RBS rejects allegations that its former directors misled investors or acted illegally.

"These things will be set out in court rather than in an early settlement, we have a good defense on this," RBS Chief Executive Ross McEwan said this month.

(Reporting by Aashika Jain in Bangalore; Editing by Ken Wills)