The share price of Hyundai Merchant Marine Co. (HMM), the country’s second-largest container carrier, halved in the past one month after the company issued new shares and announced to issue convertible bonds. Offshore and institutional investors reportedly gained up to 80 percent returns in just three weeks from short selling on HMM stocks while retail investors who are restricted from short selling could do nothing but helplessly watch the stock prices plunge.

The cargo carrier’s recapitalization through new share issuance that the financially-strapped company led as part of its restructuring plan clearly showed the loophole of the current regulation over short selling.

According to the Korea Exchange on Monday, the volume of the short sale orders on HMM shares that continuously increased since July fell by 450,000 shares on August 3 only when the share price dropped to reach the lowest for the trading day. The balance of HMM stocks on short sale orders on August 2 was 2,940,000 shares, or 9.0 percent of the cargo carrier’s total outstanding shares, after increasing gradually from 2,170,000 shares, or 6.6 percent of the total outstanding shares on July 1. And a total of 450,000 shares or 58 percent of the volume of short sale orders that expanded by 770,000 shares in a month were short sold only over a day on August 3.

The HMM share price nosedived 27.9 percent from the previous day to close at 7,640 won on August 3 as the new stocks that were planned for issuance poured into the market on top of the company’s announcement from the day before that it plans to issue convertible bonds worth 200 billion won ($180.8 million). The sharp drop in HMM’s market value occurred as big investors short sold their HMM stocks to actualize profits, market observers say.

The offshore and institutional investors that rarely traded HMM stocks purchased 1 million shares and 3.57 million shares, respectively, on August 3 alone. Considering that foreign investors bought 27,000 shares and institutions purchased 1,800 shares on the previous day, a large volume of HMM stocks traded on August 3 must have been for short covering, said an unnamed finance industry source.

Prior to the shipper’s planned new share subion days between July 18 and 19, offshore and institutional investors short sold 450,000 HMM shares during the five trading days until July 15. If an investor borrowed HMM stocks with an average price of 13,700 won apiece for short selling and purchased HMM share at 7,640 won per share, which is the closing price on August 3, to return to the lender, then the investor would have gained profit with a return of 79.3 percent in just three weeks. And even if an investor borrowed HMM stocks, subscribed for new shares, and repaid with the new shares, the investor could have earned a 30 percent profit without any risk.

The retail investors, on the other hand, incurred losses during the same period as the HMM share price dropped 45 percent to 7,640 won from 13,700 won, the August 3 closing price and the average price between July 11 and 15, respectively. The individual investors that purchased HMM’s new stock at 9,530 won apiece through the container carrier’s public offering also incurred about 20 percent loss during the same period. Retail investors cannot trade HMM stocks for short selling because the shipping company’s shares are under watch by the Korea Securities Finance Corp. due to high investment risks.

Local financial authorities’ decision to allow ailing companies to recapitalize through issuing new shares in a bid to provide financial support to them has resulted in bigger losses for retail investors that they would have to bear, industry watchers say.

By Choi Jae-won

[ⓒ Pulse by Maeil Business News Korea & mk.co.kr, All rights reserved]