UK's FSA to require disclosure of short positions

By Dan Lalor

LONDON (Reuters) - Britain's financial watchdog said investors with significant short positions in companies issuing rights will have to disclose those positions, and began a review of the efficiency of the capital-raising process.

The Financial Services Authority, responding to severe volatility in the shares of companies conducting rights issues, particularly banks, said short selling was "a legitimate technique which assists liquidity and is not in itself abusive.

"But it is also the case that the rights issue process provides greater scope for what might amount to market abuse, particularly in current conditions," the FSA said on Friday.

"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. It can be particularly prejudicial to the interests of small investors," the regulator said.

Shares in British mortgage bank HBOS Plc HBOS.L, which is on the middle of a 4 billion pounds ($7.8 billion) rights issue, rose 11 percent to 313-3/4 pence. On Thursday, HBOS stock traded as low as 249 pence, half its price before the rights issue was announced on April 29 and below its 275 pence rights price.

Earlier this month, another mortgage lender, Bradford & Bingley Plc BB.L was forced to cut both the price and the size of its rights issue after its share price fell below the original steeply discounted price.

The FSA said the problem with short-selling abuses was compounded by the length of time taken to complete rights issues, and it would review how capital raising by listed companies can be made more orderly and efficient.

Fallout from the global credit crunch has resulted in some of the largest ever cash calls from companies around the world, including in Britain where Royal Bank of Scotland (RBS.L) carried out the world's biggest ever right issue.

A company's share price often falls when it announces a rights issue as investors, worried about the dilutive effect, position themselves to buy the new stock.

The FSA defined a significant short position as 0.25 percent of the issued shares achieved via short selling or by any instruments giving rise to an equivalent economic interest.

It is the second time in three months that Britain's biggest mortgage lender, has benefited from official intervention.

On March 19, Britain's financial authorities made a rare public move to calm jittery markets, saying they were not aware of problems at any bank and would investigate share price moves sparked by unfounded rumors.

HBOS HBOS.L, bore the brunt of the rumors on the day, with its shares down 17 percent at one point.

(Editing by Louise Ireland)