The premature selling of shares obtained under placements may constitute illegal short selling, Hong Kong market regulator the Securities and Futures Commission (SFC) has said.
The trade in question is that of selling shares that are in the course of being obtained under a placement, before the shares formally arrive.
The SFC looked into the matter and found that some firms believed the sale of shares to which they had subscribed would not amount to illegal short selling, even if they did not have the shares when they placed the sell order.
They were performing the trade on the rationale that they could settle it on settlement day using the placing shares allotted to them. For example, they might have been relying on a promise from their placing agent about the number of shares they stood to receive.
The SFC says that placing shares will remain conditional until completion of a placement and a person shall not sell securities unless at the time he or she has “a presently exercisable and unconditional right to vest the securities in the purchaser of them”.
In other words, a trader cannot sell shares on the assumption that he is in possession of a promise that he will receive them. Doing so would constitute an illegal naked short sale and the seller runs the risk of a HK$100,000 fine and two years in prison.