Regulator to put a stop to short sell intrigues

  • Story by: Catherine Couch
  • Magazine: MortgageAdviser
  • Published Wednesday , June 25, 2008

The FSA has announced new rules for investors who short sell shares in companies undertaking rights issues.

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The move has been made as a result of the volatility in the shares of companies conducting rights issues which the regulator believes has increased the potential for market abuse.

Lenders including HBoS, RBS, Lehman Brothers and Bradford & Bingley have all announced rights issues this year, with Barclays confirming last week that it was actively considering placing a pre-emptive offer to existing shareholders to raise cash.

HBoS in particular has been targeted by short selling, which pushed its share price much lower than the 275p rights issue price set by the lender.

From this week, the FSA said investors with short positions on companies carrying out a rights issue will have to declare their interest.

In a statement the FSA recognised the increased potential for the market abuse the short selling had and the effect it was having on the share price of the companies conducting rights issues.

The regulator said the act was not only potentially damaging to the issuers in question but also to confidence in the overall fairness and quality of the UK market.

It said the problem was compounded by the length of time taken to complete rights issues.

The FSA is to conduct a review into how capital raising by listed companies could be made more orderly and efficient.

It has also been considering what immediate measures can be taken to maintain market confidence and prevent potential abuse during rights issues.

The FSA said it viewed short selling as a legitimate technique which assisted liquidity and was not in itself abusive.

However the rights issue process provided a greater scope for what might amount to market abuse, particularly in the current conditions, it said.

The FSA believes that, in the first instance, improving transparency of significant short selling in shares would be a good means of preventing the potential for abuse.

The overall effectiveness of the measure will also be considered as part of the wider review.

In addition to the new disclosure regime, the FSA will also look at whether it might be necessary to take further measures in the short selling area.

The regulator said it was currently examining a number of options including restricting the lending of stock of securities in rights issues for the purposes of enabling short selling and restricting short sellers from covering their positions by acquiring the rights to the newly issued shares.