A review is to be conducted into how capital raising by listed companies can be made more orderly and efficient, but the FSA has also taken immediate steps, to come into effect from Friday 20 June 2008, which will require the disclosure of significant short positions in stocks admitted to trading on prescribed markets which are undertaking rights issues. 

A “significant” short position is 0.25 per cent of the issued shares achieved via short selling or by any instruments giving rise to an equivalent economic interest.  The obligation will be to disclose positions exceeding this threshold to the market via the Regulatory Information Service by 3.30 p.m. the following business day. 

Although the FSA views short selling as a legitimate technique which assists liquidity and is not in itself abusive, it thinks non-disclosure of significant short positions gives the market a false and misleading impression of supply and demand in the securities concerned.

In addition to the new disclosure regime, it is also examining a number of options including restricting the lending of stock of securities in rights issues for the purposes of enabling short selling and restricting short sellers from covering their positions by acquiring the rights to the newly issued shares.

Guy Sears, director of wholesale at the Investment Management Association, whose members manage 45 per cent of the UK market, welcomed the move, saying: "Manipulating rights issues is not a game; it damages the wider economy and jeopardises mid-term recovery. Banks have been told to come clean and raise capital where needed. Rights issues should be the mechanism of choice. Shorting so as to suppress the share price below the underwritten price, knowing this will force underwriters to sell at a discount, is fuelled by an absence of transparency.  If banks cannot raise capital, house-builders and other major contributors to the economy will suffer.

"It will no doubt surprise many that the FSA has changed the rules at such short notice and it will cause operational headaches in the short-term; but that is a price that a few short-sellers, and not the FSA, have forced upon the market in these exceptional times."

But the UK-based Alternative Investment Management Association has expressed its disappointment with these new provisions and believes that the FSA has set an awkward precedent, in particular with the short notice and lack of consultation.

Andrew Baker, deputy chief executive of AIMA, said: “This measure appears to be in response to the need to recapitalise the banking system. This seems to be a rushed measure to assist a single sector and undoubtedly sets an awkward precedent for the future. We will be consulting with our membership and submitting a detailed response itemising our concerns to the FSA.”