Rights offerings, IPOs could suffer if government lifts short-selling ban

While the market awaits the government's final decision on whether to extend its temporary ban on short selling, the investment banking industry is expressing concerns that lifting the ban could negatively impact planned rights offerings and initial public offerings (IPOs).

Korean companies have been raising capital via rights offerings with ease since the six-month ban took effect in mid-March, as the government measure prevented speculative investors from short selling to cut prices of newly offered shares.

Before the ban was introduced, institutional investors had often used short selling to seek windfall gains by purchasing new shares at lowered prices.

Over the past couple of months, Korean Air Co. and Jeju Air Co. raised as much as 1.13 trillion won and 150 billion won, respectively, in rights offerings. Multiplex cinema chain CJ CGV, drug maker HLB and Aprogen Pharmaceuticals Co. also successfully completed capital expansion plans.

Analysts say if short selling is allowed to resume in mid-September, some companies could again become the target of short sellers and see difficulty raising funds.

“I don’t think rights offering plans will be botched even if short selling is allowed again, but the amount companies can raise from such offerings would be much less,” said an executive in charge of corporate financing at a local brokerage. “They may have to readjust the size of the rights offering if the government decides to green light the speculative trading practice.”



BAN SET TO EXPIRE IN MID-SEPTEMBER

The Korean government imposed a six-month ban on short-selling of all listed stocks on March 16, on market volatility in the aftermath of the COVID-19 pandemic. The temporary ban is set to expire on September 15.

When the financial crisis wreaked havoc on global financial markets in 2008, regulators worldwide enforced similar bans on short selling, largely amid fears that the trading practice would exacerbate sharp drops in stock prices.

Short selling is a bet that the price of a stock will fall, and is considered a risky but lucrative trading strategy, mostly applied by hedge funds. Short sellers borrow shares and immediately sell them, betting that the price will fall before they buy back the shares and return them to the lender, taking the price difference, or margin, as profit.

With the pandemic showing signs of easing in Korea, local financial regulators have considered whether or not to extend the short-selling ban.

The Financial Services Commission said nothing has yet been decided regarding extending the measure, but FSC Chairman Eun Sung-soo hinted at the extension, saying the regulator will “take into consideration the ongoing COVID-19 pandemic."

Analysts said the resumption of short selling could also hurt the IPO market because the trading practice would slash companies' valuations, when they go public, below those of similarly rated rival firms.

Pharmaceuticals and bio companies, often victim to speculators in the past, would be particularly susceptible to short selling.

Write to Jin-Seong Kim at jskim1028@hankyung.com