South Korean stock market authorities have detected sudden spikes in stock borrowings involving several companies just one or two days before they announced plans to sell new shares.

Authorities suspect speculators used insider information about a company’s capital increase plan for short selling opportunities as the stock price usually falls after the capital increase.

According to the Financial Supervisory Service (FSS) and the Korea Exchange (KRX) on Monday, 32,200 shares of KOSDAQ-listed ViroMed Co. were borrowed one day before the company’s announcement on new share issue on July 21. That is 20 times higher than the daily average of 1,350 shares borrowed for the five sessions to July 19. On July 22, 53,200 shares were actually short sold, 18 times higher than the daily average short selling of 3,000 issues recorded in the five sessions before the announcement.

The case was similar for KOSPI-listed Hansol Paper Co. Stock borrowing just before the company’s new share sale plan was released on June 3 reached 2.56 million shares, a 50-times surge compared to a four-day average of 50,000 shares in stock borrowing before the plan announcement.

An industry official said that he believes the companies’ new share sale plan was leaked, as he can’t find any other good reason for the abnormal surge in the stock borrowing. The announcement of a new share sale plan affects investor sentiment negatively and prompts prompts short selling.

One day after the new share sale plan was announced, ViroMed’s stock price plunged 10.8 percent from the previous session to close at 124,800 won. The stock price declined about 5 percent further for a month afterwards.

Given that the price of the company’s new shares was set at around 95,000 won apiece, short sellers could get up to 20 percent return. Industry experts believe that speculators take advantage of a loophole in capital market regulations because stock borrowing in itself is not considered illegal unless actual transactions based on insider information occur.

By Choi Jae-won

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