Short selling on Hyundai Merchant Marine Co. (HMM) stocks has sharply increased over the last week as a growing number of institutional and foreign investors who bet on a further fall in the debt-ridden company’s stock before its planned new share issuance early next month have hurriedly placed short sale orders on its stocks. In particular, those speculators who have shorted the company’s stocks since the shipping company announced the new share price last week are expected to gain up to a 30 percent profit, stirring controversy whether investors who short stocks of a company with a new share issuance plan should be banned from buying the company’s new shares.

According to the Korea Exchange on Monday, total 459,750 issues of HMM stock, worth about 6 billion won ($5.3 million), were shorted for five consecutive trading sessions from July 11 to 15, and it is about four times more than the company`s short sale volume of 118,741 issues recorded during the week ending on July 8.

The nation’s second-largest container carrier, which earlier last month announced to issue new shares as part of its efforts to salvage itself from the liquidity crisis, said last week that it would issue 280 million new shares at 9,350 won per piece, or 30 percent discount from the average closing price of 13,611 won between July 11 and July 13. It will sell new shares to shareholders, creditors, bondholders and shipowners as part of a debt-to-equity swap to cut its debt and aims to list 2.5 trillion won worth new issues on August 5.

As the volume of new shares is eight times more than the number of the company’s current outstanding stocks (32,784,609 issues), an increasing number of investors have rushed to bet on a HMM stocks’ decline amid growing concerns over a diluted stock value due to an overhang issue.

On July 14 and 15 right after the company’s announcement of its new share issuance plan, the number of HMM stocks that were placed under short sale orders reached 107,206 shares and 182,996 shares, respectively. Investors who shorted HMM stocks at a price in the 13,000-won range apiece would gain as much as a 30 percent profit when they pay back their lenders with the company’s new shares they could repurchase at 9,530 won per piece.

Short selling allows investors to sell stocks that they don’t own. An investor who bets on a fall in a certain company’s stock in the future can borrow stocks of the company from a brokerage to sell them and repay the lender with the company’s stocks that the investor purchases in an open market later. If the stock price falls, the investor makes a profit on the difference or vice versa.

Currently major short sellers of HMM stocks appear to be institutional and offshore investors. Retail investors can’t trade HMM stocks as the Korea Securities Finance Corp., which acts as an intermediary in securities borrowing and lending in the country, restricts borrowing of stocks of the companies under administrative control like HMM due to high investment risks. But institutional and offshore investors can borrow stocks from public funds or asset management firms to trade.

As of July 13, overseas institutional investors including Morgan Stanley, JPMorgan Chase & Co., UBS AG, and Merrill Lynch made the list of investors whose short-selling balance for HMM stocks exceeded 0.5 percent of the company’s outstanding issues.

Although short selling is a legitimate stock trading strategy, market analysts said it may be necessary to ban investors who short sell stocks of a company with a plan to issue new shares in the near future from buying the company’s new issues, citing unfair investment opportunities of short sales given to a limited number of investors on top of the risk of price manipulations following short selling.

Korean financial authorities also acknowledges the need to amend the country’s short-selling rules after it has witnessed a number of sudden hikes in short sales of certain companies’ stocks before their new share issuance in the recent two to three years. An unnamed official at the Korea Exchange said it is highly likely that foreign or institutional investors who short stocks of a certain company before its new share issuance can recapitalize by repurchasing the company’s new shares at lower prices than the price at which it borrowed. Also citing concerns over potential price manipulations, it is needed to restrict short sellers from buying new shares, he added.

By Choi Jae-won

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