EYEBROWS were raised recently when the underwriters to the Shanghai Petrochemical issue reserved the right to stabilise the price of the company's shares, contrary to the accepted orthodoxy that stabilisation is illegal in Hong Kong. Stabilisation is a common feature of international markets. The prospectus made it clear that any stabilisation in Hong Kong or elsewhere would comply with relevant laws and regulations. The legality of stabilisation under Hong Kong law was not formally resolved when the prospectus was published or during the offer period. After lengthy discussion, the SFC allowed market purchases to cover demand in the international offer, but ''prohibited'' other stabilisation activities. Stabilisation is a form of benign market rigging to ensure orderly distribution of shares immediately after their issue. It is standard practice in internationally syndicated offerings, where distribution of the securities continues after the offer has closed. Stabilisation, before or after the issue, consists of buying in the market at or below the initial issue price on the grey or official markets. In international syndications such as that of Shanghai Petrochemical, securities are in effect placed before the underwriting agreement is signed. They may be deliberately over-allotted, requiring market purchases to be made to satisfy delivery obligations, with obvious effects on the market price. If the market price goes above the issue price, the underwriters could make a loss on the stabilisation. A ''greenshoe'', or over-allotment, option allows the underwriters to call for more shares to be issued to an agreed maximum. This is increasingly common in international issues, and was used in the Wharf Euroconvertible bond issue and included in the Shanghai Petro float. Hong Kong law on this is sadly muddled. Section 137 of the Securities Ordinance addresses stabilisation most directly but does not have any regulations made under it. Section 135, which purports to ban stabilisation under the law relating to false markets, is famously unclear. To get a conviction, a prosecutor must show that the market price of securities has been stabilised by sales and purchases transacted by persons acting in collaboration and aiming to secure a market price not justified by the assets or profits of the issuer of the securities. Prove that. Section 135 covers securities listed in Hong Kong, and thus was not relevant to the Wharf bond issue. The section does not cover one person buying but not selling. It is not clear whether the section applies to transactions carried out overseas (it probably does), or to pre-listing transactions (in the author's view, it probably does not). It would therefore seem to be possible to stabilise and avoid breaking Hong Kong law or regulations. International laws and regulations vary as to whether, and in what circumstances, stabilisation is allowed. However, stabilisation is ubiquitous in the Euromarkets and specifically allowed in the US and UK. In the US, stabilisation is illegal except in limited circumstances to prevent or slow a fall in the share's open market price during share distributions. It usually occurs during offers of common stock. In the UK, stabilisation is also illegal except that one stabilising manager may, under certain publicity and pricing conditions, stabilise during a (normally) 30-day period. Stabilisation is rare in domestic equity issues, whose structure is similar to those of Hong Kong issues. However, the prospectus for the third BT offering reserved the right to stabilise the international tranche. The law provides the worst of all worlds: reputable intermediaries will have to think carefully before carrying out what, in the international markets, is generally seen as legitimate stabilisation. But the unscrupulous will not be prevented from market-rigging. There is now a consensus in the international markets that limited, regulated stabilisation helps to produce an orderly, stable market for newly issued securities. As Hong Kong's participation in these markets increases, the law needs reforming. Rules should be drawn up saying what stabilisation is allowed and requirements for disclosure, price restrictions and timing. Otherwise Section 137 should prohibit it. Section 135 needs clarification and an exemption for permitted stabilisation. The territorial application of both sections should also be clarified. Stabilisation may not yet be right for mainly domestic Hong Kong public offers. But in issues such as Shanghai Petrochemical's, where stabilisation is important to the success of a major international tranche, Hong Kong law should allow for orderly, regulated and disclosed stabilisation.