Short selling

Hong Kong bourse sees most short-seller attacks in 2017, prompting tightening regulation

Grant Thornton says the active short-selling activities could have a positive impact on improving Hong Kong’s market quality

PUBLISHED : Wednesday, 04 October, 2017, 7:04pm
UPDATED : Wednesday, 04 October, 2017, 11:02pm

Hong Kong’s listed companies were on the receiving end of the most short-seller attacks in 2017, with most of those allegedly involved in fraudulentactivities, according to global accounting giant Grant Thornton.

The unusually active short selling has prompted tighter scrutiny on initial public offerings (IPOs) and listed companies, as the Securities and Futures Commission (SFC) and the Hong Kong Exchanges & Clearing (HKEX) have taken a more active role in trying to eliminate subpar companies from the market, said Barry Tong, advisory partner at Grant Thornton.

“We’ve noticed a sharp increase in short-seller attacks against Hong Kong’s listed companies this year,” he said. “There are more negative allegation reports in the past 12 months than ever.”

Tong said they have observed a lot more new short sellers with both overseas and potentially mainland Chinese backgrounds.

Major allegations against the companies include exaggeration of financial figures, off-balance sheet arrangements, and non-disclosure of related party transactions.

The increase in short-selling activities has prompted regulators to boost scrutiny.

The SFC has adopted a new front-loaded approach in the past few months to directly intervene in serious listing matters, suspending more IPO applications that fail to meet listing conditions than in the past three years.

The HKEX has also proposed tightening of delisting rules for companies that have suspended their stock trading for a long period of time.

In late September, HKEX forced Asia Coal to suspend trading and enter into delisting procedures, citing its inactive business operations and low asset value. The firm soon announced a deal to acquire a mainland developer, trying to retain its listing status.

In August, HKEX also suspended the trading of Victory Group due to similar reasons.

“The regulators have released a firm signal about tightening scrutiny,” Tong said.

In particular, Tong said they have noticed the SFC has taken a different, more active approach than the past, including initiating investigations on potentially problematic companies and going to mainland China to seek evidence from banks, suppliers, or customers of some companies.

Overall, the increase in short-selling activities and tightening regulations will have a positive impact on the quality of Hong Kong’s listed companies.

“It will eliminate subpar companies from the market,” Tong said.

“It also has a ‘demonstration effect’ and rings alarms to existing firms that have suspended their trading for a prolonged period or lack sufficient business operations, prompting them to come out with solutions to address regulators or stakeholders’ concerns and resume trading as quickly as possible. Thus small investors can exit.”

As the SFC and HKEX have tightened supervision on IPOs, short-sellers have shifted their focus from new listings to companies with longer listing histories, seeking opportunities to attack those with fraudulent activities from a few years ago, Tong said.

“This is a new phenomenon that we’ve observed this year. And we expect the trend to continue in the future amid tightening regulations,” he said.