Short shrift for rights speculation

Selling short shares or other instruments equivalent to more than a 0.25% economic interest in the equity of a company embarked on a rights issue must be disclosed to a Regulatory Information Service by 3.30pm the following business day, under new provisions designed to combat market manipulation, which took effect on 20 June 2008. The FSA says that unrestricted short sales not only affect the ability of issuers to raise capital through rights but also reduce confidence in the “overall fairness and quality of the UK market”. Other complementary measures under consideration are restricting stock lending that is intended to support short selling and preventing short sellers from buying rights in newly issued shares to cover their exposures. The FSA has also issued a set of supplementary FAQs which, inter alia, note that while the holder of an economic interest in a company in a rights issue may net its long and short positions to determine if it is short more than 0.25%, the person “cannot net off a short position in the company’s existing (undiluted) shares with a long position in rights under the rights issue.” It is also not allowed to net off a short position against any shares in the company that have been borrowed.