UK Regulator Takes Aim at Short Sellers

Britain's financial watchdog said investors with significant short positions in companies issuing rights will have to disclose those positions, as it unveiled a review of the efficiency of the capital-raising process.

The Financial Services Authority, responding to severe volatility in the shares of British companies conducting rights issues, said on Friday 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. 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.

The FSA said the problem 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, HBOS, and Bradford & Bingley have all asked their shareholders for extra cash.

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.