In an effort to curb suspected insider trading, Japan will issue new guidelines to ensure that short selling does not harm the interest of new share issuers and penalize long term investors by distorting the market.
Under the new rule, an investor will not receive newly issued shares if he had shorted the same company’s shares in between the announcement for new shares were made and the listing price was announced.
The ruling comes after it was found that massive shorting has harmed both the long term shareholders and the company’s issuing the shares. The Financial Services Agency plans to enforce the law between April and September of 2011.
Currently Hedge funds and other speculative investors short sell shares when a company announces fresh share issues. Later they cover their positions by buying the shares during allotment and make a neat profit since new shares mostly hit the market at a discount.
“It’s a trading practice that is negative for long-term shareholders and for the companies and it is due to a regulatory loophole, it is both necessary and desirable that the loophole is closed”, observed Ken Kiyohara at the law firm Jones Day.
The US regulator disallows an investor to buy back shares during allocation if s/he has shorted them during a specific time period.
Japanese regulators have been flooded with complaints about excessive short selling by funds fuelled by rampant insider trading.
However, some experts think that although the regulator’s intention is honest, it may not be sufficient to curb insider trading. “I would argue that it provides an even greater incentive to get the information before the deal is announced”, said a banker adding that the ban should be effective earlier, even before any deal is announced.
The Japanese FSA is planning to promote Rights Issue in Japan, something less prevalent in the country. In a Rights Issue, existing shareholders are given preference when new shares are issued over first time buyers. It has also instructed Japan Securities Dealers’ Association to enforce stricter compliance by issuing companies and their underwriters.