by Thomas Soon, Yong Yen Nie & Surin Murugiah
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KUALA LUMPUR: Certain investors are believed to have engaged in an unusually massive short selling on Bursa Malaysia at the end of last week in anticipation of a heavy selldown in the market following the opposition’s move to file a no-confidence motion against the prime minister.
However, despite the initial heavy selling , the investors appeared to have been trapped in their short positions by the quick and relative recovery of the market and could not deliver the shares that they did not possess, market players said yesterday.
This resulted in an unusually large-scale buy-in exercise initiated by Bursa Malaysia Securities Bhd yesterday involving more than eight million shares of close to 60 companies.
When contacted by The Edge Financial Daily, Bursa Malaysia could not comment on the matter yet, but is expected to issue a statement today.
The extent of the buy-in exercise caught many intermediaries, including remisiers, dealers and brokers, off-guard, who were puzzled by the big number of companies and number of shares involved.
One remisier, who declined to be named, said of her entire 30 years in the trade, she had never seen such a massive buy-in exercise. “The authorities must investigate extensively to determine who were responsible for what appears to be an unusually large short-selling exercise last Thursday,” she said.
However, other sources said some of the shares could have been short-sold last Friday, when the motion of no confidence against Datuk Seri Abdullah Ahmad Badawi and his cabinet was filed in parliament. The motion was rejected by the Dewan Rakyat Speaker on Monday.
Last Thursday, the Kuala Lumpur Composite Index closed down 4.32 points at 1,135.49, after recovering from an intra-day low of 1,129.92. On the following day, the KLCI closed at 1,150.39, up 14.9 points, off its intra-day low of 1,136.4.
Yesterday’s buy-in involved blue-chip counters such as Public Bank Bhd, MISC Bhd and Tanjong Plc.
“We want to know what happened. We want to know who are responsible for the short-selling. As it is, the market is already in such an uncertain state, we do not need people to benefit from the market chaos,” said a remisier.
Sources said a foreign fund, JP Morgan, participated in the buy-in exercise and sold a basket of blue-chip stocks of a significant quantity at 10 bids above the previous day’s closing prices, being the penalty for short-selling.
Brokers said such buy-ins had to be initiated when there was a failure to deliver trades. Market intermediaries such as remisiers and dealers could access the buy-in list via their broker front-end screen.
The list of stocks included Multi-Purpose Holdings Bhd, Carlsberg Brewery Malaysia Bhd, Malaysian Resources Corporation Bhd (MRCB), Zelan Bhd, Pos Malaysia Bhd, Unisem Bhd, RHB Capital Bhd, Star Publications Bhd, Kinsteel Bhd, Affin Holdings Bhd, SapuraCrest Petroleum Bhd, Proton Holdings Bhd, Sunway City Bhd and Sunrise Bhd.
Notably, several counters including Pos Malaysia, Tanjong, Carlsberg, Star and Zelan were not among the 100-approved securities on Bursa’s regulated short-selling (RSS) list.
The share prices of the stocks involved did not move significantly and most have ended flat or slightly up since last Thursday.
Bursa Malaysia re-introduced the RSS early last year after the practice was banned in 1997, following the Asian financial crisis. Under the RSS, as at Jan 28 this year, there were 100 approved securities.
RSS is defined as the selling of stocks which a person does not presently own, but for which such person has made arrangements to borrow.
In this case, it was apparent that those who had short-sold the stocks did not have such an arrangement, thereby raising the question of legality of their activity.
Any individual can engage in RSS with the short sales to be settled with the borrowed stocks. This borrowing must be made within the Securities Borrowing and Lending (SBL) framework established by Bursa Malaysia Securities Clearing Sdn Bhd.
Under this framework, Bursa Clearing will act as a Central Lending Agency (CLA). As the CLA, Bursa Clearing will borrow from lenders and onward lend to borrowers.
Any person who has the requisite number of stocks may lend them to the CLA. On the other hand, only approved participating organisations may borrow stocks from the CLA. Any other person who wishes to borrow stocks must go through the approved participating organisations. The lenders and borrowers must enter into an SBL agreement that will set out their rights and obligations.
Short-selling is governed by Sect 41 of the Securities Industry Act 1983, where subsection (1) provides: Subject to this section and any regulations that may be made, a person shall not sell securities unless, at the time when he sells them,
(a) he has or, where he is selling as agent, his principal has; or
(b) he believes on reasonable grounds that he has, or where he is selling as agent, his principal has, a presently exercisable and unconditional right to vest the securities in a purchaser of the securities.
Under Section 41 (2) a person who contravenes or fails to comply with the provisions of subsection (1) commits an offence and is liable on conviction to a fine not exceeding RM1 million or to imprisonment for a term not exceeding 10 years, or to both.
Under normal circumstances, failure to deliver the stocks could also occur due to mistakes by brokerage houses and fund managers, failure of settlement by the custodian, or even updating errors by the funds involved, sources said.
“It is rare to see such exceptional share buy-ins, but I do not think the relevant parties had any intention to break any law,” a source said.
Meanwhile, an industry veteran familiar with securities’ dealings said broking houses, under the present RSS rules, would find it hard to justify that the failure of deliveries were due to mistakes.
“There is no room for error with the new rules in place. As long as the stocks are not from the approved list, that itself constitutes an offence,” he said.
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