Could a ‘seasoning period’ after IPOs help newly listed companies?

I REFER to Ben Paul’s recent piece on Singapore initial public offerings (“MAS, SGX must address our IPO problem”, Oct 19), and an earlier letter to the editor (“Short-selling can boost SGX’s liquidity, but market resilience must be preserved”, Sep 28).

In my opinion, there is a link between the two issues, which I have pointed out before in the past, when I was president of the Securities Association of Singapore in FY2016.

In my view, disorderly short-selling can negatively affect sentiment unless appropriate rules are applied and enforced.

This is particularly so during the first month of a stock’s new listing, when sentiment towards a stock will be fragile and investors need more time to assess the company.

Perhaps the Singapore Exchange and the Monetary Authority of Singapore could consider a “seasoning period” of three months when short-selling is restricted to “covered shorts” and “uptick rules” apply.

Let me explain.

For one, all sales should be settled so that traders cannot short-sell a stock and cover it back within the same day – otherwise called an “uncovered short”.

Specifically, anyone who sells a share must own it or have borrowed the asset before the sale.

This prevents intra-day short-selling, that is, a trader selling without having the intention of settling by delivering the shares. Their objective, instead, is making a profit from buying back the share within the same trading day.

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In Hong Kong, carrying out an uncovered short is a criminal offence. Limited exemptions to this rule apply only to authorised market makers.

Second, introduce an “uptick rule” for short-selling with borrowed shares. This refers to a regulation that prohibits short-selling a stock below its current best-asking price.

This should limit short-sellers from creating an impression of massive selling pressure by pushing prices down quickly. Again, this is required in Hong Kong, and also in many other markets.

From my experience, IPOs that trade below listing price in the first few trading days will find it very difficult to rebound back to listing price.

This proposed “seasoning period” could give newly listed companies more opportunities to show that they are tracking well on points raised in their prospectus.

Since covered shorts with the “uptick rule” applied are still permitted, overpriced or poor IPOs will still face selling pressure, allowing price discovery to continue functioning effectively.

Lim Kok Ann