The Stock Exchange of Thailand (SET) will allow foreign investors to borrow stocks listed as non-voting depository receipts (NVDRs) for short-selling transactions, effective today.
Last year, several brokerage firms were fined by the SET because they allowed foreign investors to trade stocks without securities-backed collateral or had no securities borrowing and lending.
The practice is known as naked short selling, which is against the rules and regulations of the SET. All investors are required to have securities-backed collateral before ordering trade transactions.
SET president Pakorn Peetathawatchai signed the order on March 19 to let foreign investors borrow underlying securities on the NVDR list as ordinary shares eligible for short-selling transactions.
Naked short selling, or naked shorting, is the practice of short-selling a tradable asset of any kind without first borrowing the security or ensuring that the security can be borrowed, as is conventionally done in a short sale.
When the seller does not obtain the shares within the required time frame, the result is known as a failure to deliver. The transaction generally remains open until the shares are acquired by the seller or the seller's broker settles the trade.
The main purpose of NVDRs is not only to stimulate trading activity in the Thai stock market, but also to eliminate foreign investment barriers, such as the foreign investment limits and the impediments for institutional investors who previously could not trade in the existing Thai Trust Fund.
By investing in NVDRs, investors will receive all financial benefits similar to investing in ordinary shares, such as dividends, right issues or warrants, with the exception of voting rights.
Pattera Dilokrungthirapop, chairwoman of the Association of Securities Companies, said the SET sets the condition of putting a flag on stocks that have short-selling orders to remind investors that share prices could fluctuate more than usual.
Short-selling prices cannot be offered below market prices, in order to safeguard against share dumping, Mrs Pattera said.
"Investors should not worry that foreign short-selling will dump stocks and cause the stock market to plunge, as the SET will control transactions by putting a flag on short-selling stocks and disclose transaction volume," she said.
After the rules and regulations on short-selling become clearer, foreign trading volume is expected to gradually increase, but market sentiment remains a key factor dictating fund flow movement.
