Top marks to CBA for seeking information about whether institutional applicants for the $1.5 billion shortfall in its recent rights issue had short positions which they intended to cover in the book build.
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Whether or not the institutions provided this information, the CBA was justified in attempting not to allocate shortfall shares to short sellers.
One thing is absolutely clear. Allowing short selling when companies are raising capital or markets are under pressure from external shocks increases the already significant risks for smaller share investors.
Both the ATO and ASX have over recent years assisted short sellers by facilitating the sale of borrowed shares by institutional investors including hedge and long short managed funds.
The ATO ignores share lending transactions for capital gains tax and the 45-day holding period for accessing imputation credits when the borrowed shares are short sold on market.
This allows superannuation funds and other taxable investors to lend their shares to short sellers with no adverse tax consequences. By facilitating short selling, the ASX has created more volatility then would otherwise occur and creates largely risk-free trading opportunities for cash-rich large institutional investors.
The recent CBA renounceable entitlement issue provides an excellent example of how easily institutions can profit at the expense of less sophisticated small investors. APRA's measures to force the banks to raise capital was already driving down bank share prices and the rights issue was always going to put the CBA share price under further pressure.
By moving quickly and short-selling CBA shares before and after the announcement of the issue, the institutions were guaranteed quick profits as the share price fell, in this case temporarily, just above the issue price of the new shares. The falling share price also guaranteed a shortfall by discouraging some smaller shareholders from taking up their entitlements.
The better informed smaller shareholders were able to lock in a good return by selling their entitlements as quickly as they could if they opted not to buy the new shares. Those who did not subscribe or sell their entitlements will now receive a much lower amount of $2 a share from the book build.
Overall, this is a sorry tale for all small share investors including CBA shareholders who are now less certain about future movements in the share price. This and similar past short selling-supported market price falls does not encourage smaller investors to invest in shares.
While investing in bricks and mortar also has risks, property values cannot be manipulated by sales of properties not owned by the sellers. Moreover, property transfers trigger capital gains and stamp duty liabilities whereas lending shares to short sellers has no adverse consequences for the owners. Michel O Sullivan
Daryl Dixon is the executive chairman of Dixon Advisory
