Britain’s FSA steps in to curb rights-issue short selling

Jun.13, 2008 in Market Outlook

FSA steps in to curb rights-issue short selling

By Sarah Turner, MarketWatch

Last Update: 6/13/2008 6:43:00 AM

LONDON (MarketWatch) - Britain’s financial regulator moved to clamp down on the
short selling of companies undertaking rights issues to raise cash on Friday, in
a move to shore up confidence in increasingly fragile equity markets.

The Financial Services Authority said early Friday that it intends to take steps
to “maintain market confidence and prevent potential abuse during rights issues.”

As part of the crackdown, the FSA will force those holding significant short
positions, or 0.25% of a company’s issued share capital, to disclose their
positions, starting from June 20.

Short selling is when investors sell shares they borrow in the hope that the
stock price will fall and they will be able to repurchase the shares at a lower
price to make a profit.

The FSA said that, although it views short selling as a legitimate technique
which assists liquidity and is not in itself abusive, the rights issue process
provides greater scope for market abuse, particularly in current volatile market
conditions.

“We consider that, in the first instance, improving transparency of significant
short selling in such shares would be a good means of preventing the potential
for abuse,” the FSA said.

The FSA said that it believes, during rights issues, non-disclosure of
significant short positions gives the market a false and misleading impression of
supply and demand in the securities concerned.

The news from the FSA boosted shares in HBOS (UK:HBOS), which is Britain’s
biggest mortgage lender by market share and currently in the middle of a 4
billion pound ($7.8 billion) rights issue.

Shares were lately up 7.5% at 304 pence in London, having traded as high as 314
pence early in the session.

“Comments from the FSA on short sellers and rights issues are a big part of the
gain in the (HBOS) share price on Friday,” said Oliver Gilvarry, head of research
at Dolmen Securities in Ireland. “It might not be as attractive for short sellers
to push down shares of companies undertaking rights issues,” he added.

Earlier in the week, HBOS was forced to put out a statement saying that its
rights issue was going to plan after its stock dropped below the 275 pence level
at which it’s priced the discounted offer.

The drop contributed to another wild day for London equity markets when the FTSE
100 index lost more than 100 points.

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