Alternative Investment Management Association
Scott Carnachan, Consultant
Hong Kong prohibits naked short selling. Section 170 of the Securities and Futures Ordinance (SFO) makes it an offence for a person to sell securities at or through a recognized stock market (the Stock Exchange of Hong Kong (SEHK)) unless at the time he or she sells them:
(a) he or she has or, where selling as an agent, his or her principal has; or
(b) he or she believes and has reasonable grounds to believe that he or she has or, where selling as an agent, that his or her principal has, a presently exercisable and unconditional right to vest the securities in the purchaser of them. A breach of section 170 is a criminal offence which carries a maximum penalty of $100,000 fine and two years of imprisonment upon conviction.
On 25 July 2013 a retail investor pleaded guilty in the Magistrates Court to illegal short selling and was fined HK$3,000 and ordered to pay costs. The investor sold excess rights shares of a company listed on the SEHK after he had applied for them, but before he had received the shares or received confirmation as to the quantity of excess rights shares that would be issued to him. The Securities and Futures Commission (SFC) is also prosecuting another individual and a company for illegal short selling in connection with the same rights issue.
The SFC subsequently issued a press release on 1 August 2013 (available here) advising that investors and intermediaries could face criminal prosecution for illegal short selling if they sell placing shares before completion of a placement. The press release noted that a placement before its completion is subject to various conditions which may or may not be fulfilled, the SFC takes the view that the issue of placing shares will remain conditional until completion of the placement and, as a result, a person cannot have reasonable grounds to believe he or she has a presently exercisable and unconditional right to vest the placing shares in a purchaser.
The SFC press release is a warning to market participants. It indicates the SFC is willing to bring prosecutions on this basis. Market participants should review their Hong Kong short sale procedures in light of the SFC’s stated view, to avoid being subject to potential legal and regulatory action and related reputational issues.
As a reminder, Hong Kong’s short sale requirements also include the following:
(i) short sales are only permitted for designated securities – the current list of designated securities is available on the SEHK website, here;
(ii) short sales are subject to the tick rule, meaning that the sale cannot be at a price lower than the best current ask price;
(iii) both the seller and the exchange participant effecting the sale are required to mark the order as a short sale;
(iv) weekly reporting of short positions in certain shares above the applicable threshold, being the lower of (i) 0.02% of the relevant company's issued share capital, and (ii) HK$30 million – the current list of shares subject to this reporting requirement is available on the SFC website, here.
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