There should be similar measures taken here in America also.

U.K. Forces Short-Selling Disclosure in Rights Offers (Update3)

By Jon Menon and Alexis Xydias

June 13 (Bloomberg) -- The U.K. will demand disclosure of short selling in rights offerings and may restrict investors from borrowing the stocks after plunging share prices hampered banks' attempts to increase capital.

The Financial Services Authority will impose the requirements June 20, the regulator said today in a statement in London. They follow a slump in Royal Bank of Scotland Group Plc and HBOS Plc as they tried to raise 16 billion pounds ($31 billion) of capital by selling new shares. HBOS, the U.K.'s biggest mortgage lender, rose as much as 11 percent today.

Britain, regarded as the most open of the world's financial centers, becomes the first major market in Europe to put limits on short-selling. The FSA cited short bets for ``severe volatility in the shares of companies conducting rights issues.'' HBOS, seeking to raise 4 billion pounds in its share sale, fell below the price of its rights offer this week before recovering.

``The FSA is trying to avoid market abuse in an area that has been an easy target in the current difficult market conditions,'' said Ian Murrell, a director at Wills & Co. Stockbrokers Ltd. in London. ``I am not sure how much they will be able to do, but clearly this is aimed at institutions, many of which won't want their name associated with short-selling.''

Short sellers try to profit by borrowing stock and buying it back after prices have declined. The practice is a ``legitimate technique'' that in itself isn't ``abusive,'' the FSA said. The regulator may restrict the lending of shares during rights offerings to short sellers and restrict them from covering their positions by buying the rights to new shares.

`Market Abuse'

``In current market conditions, there is increased potential for market abuse through short selling during rights issues,'' the regulator said today in a statement. ``This is potentially damaging not only to the issuers in question but also to confidence in the overall fairness and quality of the U.K.''

HBOS rose as much as 30.75 pence and traded up 8.5 percent to 307 pence at 10:30 a.m. in London. Its shares had declined to below the rights offer price of 275 pence earlier this week.

``When shares falls below the call price, then maybe that's getting into the realm of market manipulation,'' said Richard Hunter, head of U.K. equities at Hargreaves Lansdown Stockbrokers. ``They shouldn't ban short-selling outright. It's a perfectly legitimate hedging strategy.''

Simon Cawkwell, a former accountant and investor who wrote a guide to short selling, ``Evil's Good: Book of Boasts and Other Investments,'' criticized the FSA move.

``It takes someone as silly as the FSA to imagine this is an area of abuse,'' Cawkwell said. ``As a bear, I'm attracted to the honey pot, and I don't see how the honey pot has changed. There's just more silly flies buzzing around in the form of the FSA.''

`Adequate Disclosure'

The FSA's new rules apply when sellers short 0.25 percent or more of a company's shares. The FSA said it will monitor the threshold and may revise it.

``Adequate disclosure'' of a short position must be made no later than 3:30 p.m. on the day following the short sale, the FSA said in the statement.

The FSA's rules come after companies in Europe raised $62.7 billion selling stock in rights offers this year, on track for a record and already exceeding last year's total, data compiled by Bloomberg show.

RBS, Britain's second-biggest bank, finished raising 12 billion pounds in a right offering this week. RBS's shares fell 23 percent from April 21, the day before the bank announced its rights offer, to June 6, the day the share sale closed. The shares rose 1.8 percent to 233 pence today in London.

`Clean Markets'

Bradford & Bingley, which seeks to raise 258 million pounds in a rights offer, gained 0.3 percent to 72.5 pence in London. It was forced to cut the price of its share sale after late mortgage payments in the first four months of the year rose by 33 percent. Bradford & Bingley spokeswoman Katherine Conway couldn't immediately be reached by Bloomberg.

The London Stock Exchange supports the principal of the FSA's steps on short selling, said Patrick Humphris, a spokesman for the exchange. ``It's in everyone's interests that we have clean markets,'' he said. ``We support the principle that companies should be able to raise money in a rights issue without distortion in their share price.''