Short-seller scrutiny is mooted

ACCEPTABLE PRACTICE: FINANCIAL AUTHORITY CALLS FOR MORE TRANSPARENCY

FCA proposal will bring South Africa in line with global best practice.

Ayear ago Steinhoff imploded spectacularly. While the market was still reeling, a previously unheard-of research company, Viceroy, emerged with a perfectly timed report documenting many of its accounting shenanigans.

In January, Viceroy followed up with a report accusing Capitec of predatory lending practices and misstating its defaults.

After Steinhoff, investors were easily spooked and the stock fell from R1 069.30 to R800.60 instantly (it has since recovered).

Rumours were soon swirling that the reports were leaked deliberately to drive the share prices down to the benefit of shadowy short sellers.

The discussion on short selling gathered pace in February, when an internal report written on the Resilient Property Group by hedge-fund manager 36One was leaked.

The report suggested management was artificially manipulating the share prices of its group companies.

While Resilient management denies the allegations, the market isn’t convinced and the share price is yet to recover.

In the process, short selling got a bad rap. It involves selling shares that the seller has borrowed from a broker.

Sellers take on these transactions because they believe a stock’s price is headed downward and that if they sell the stock now, they’ll be able to buy it back at a lower price.

Last week the Financial Sector Conduct Authority (FSCA) published proposals aimed at bringing more transparency and regulation into the practice of short selling.

Greater disclosure will help deter market abuse and reduce the risks of disorderly markets posed by short sales.

It could also provide early warning signs of a build-up of large short positions, alerting regulators to potentially abusive behaviour and enabling them to monitor and take action effectively.

A spokesperson noted that FSCA would prefer to keep a light hand when it came to regulation.

It envisages a two-tier system for reporting and disclosure of significant short positions held in shares.

The first is a requirement to alert the regulator (private disclosure) once a net short position has reached a specified trigger threshold. If the short position then reaches a second, higher threshold, the obligation falls to the regulator to make a public disclosure.

“These proposals, if applied, would bring South Africa in line with global standards,” says Jean Pierre Verster of Fairtree Capital and non-executive director of Capitec and a man who is comfortable with the concept of better disclosureand says short sellers don’t need to hide behind a cloak of anonymity to do what they do.

He notes that others in the market may have to adjust to the idea.

The final date for submissions is January 15. From there FSCA will engage with the industry.