A SHOCK clampdown on investors who bet on big share price falls during the course of company rights issues has been ordered by the financial regulator.
The unprecedented move by the Financial Services Authority (FSA) follows slumps in the stocks of companies – particularly banks – that have recently completed or are in the process of issuing new shares.
From next Friday, 20 June, the FSA has rule
d that any investor "shorting" 0.25 per cent or more of the shares in a business doing a rights issue will have to tell the market.
In a statement yesterday, the FSA said: "In current market conditions, there is increased potential for market abuse through short-selling during rights issues.
"As a result, there has been severe volatility in the shares of companies conducting rights issues.
"This is potentially damaging not only to the issuers in question but also to confidence in the overall fairness and quality of the UK market."
The FSA said this could be "particularly prejudicial" to the interests of private shareholders.
It has also launched a wider review into how capital-raising by listed companies can be made more efficient.
The FSA added that short-selling, as it is known in City parlance, was a legitimate technique that was "not in itself abusive".
But it was also the case "that the rights issue process provides greater scope for what might amount to market abuse, particularly in current conditions".
Yesterday's move by the FSA, which took the markets by surprise, was welcomed by the British Bankers Association.
The BBA said the new rules "would improve transparency meaning the market would not get a false impression of the demand for the securities (in a rights issue]".
Recent major cash calls include HBOS, the Bank of Scotland/Halifax banking group, Royal Bank of Scotland and Bradford & Bingley.
RBS got its £12 billion cash call away a week ago, but its shares had fallen steadily towards its 200p rights issue price.
At the time of the rights announcement, RBS shares were trading at 372p, compared with last night's closing price, up 3 per cent at 236.25p.
HBOS, the middle of a £4bn rights issue, is at the centre of an FSA probe into a short-selling raid on the bank's shares in March, and the bank was widely seen as the target of a renewed raid this week that temporarily drove the share price below its 275p rights issue price.
Yesterday HBOS closed up 13 per cent at 321.75p, compared with a 486p trading price at the time it announced its cash call.
Most controversially, Bradford & Bingley changed the terms of its £300 million rights issue when the shares fell below the initial 82p rights price.
It was changed to a new issue price of 55p and came with the entrance of a new 23 per cent shareholder in B&B in the shape of private equity giant Texas Pacific Group
B&B's shares closed yesterday 8 per cent higher at 78.75p compared with the 103p they were trading at when the cash call on investors was announced last month.
BACKGROUND"GOING short" is a widespread City practice, mostly among market professionals.
It involves selling shares an investor does not actually own in the hope of buying them back more cheaply in the market later to make an overall profit.
In trading strategy, it is therefore a bet that shares are going to fall.
The shorters originally borrow the relevant shares – most commonly from pension funds – in return for a fee.
Once they, hopefully, buy the shares later at the cheaper price they return them to the original owner, pocketing the difference as profit after subtracting the fee they have had to pay the original lender.
The process is not illegal, or indeed inherently unethical – just a different view on the direction a share price will go.
