Sat, Sep 04, 1999 page17

• Curbs set for warrants on electronics

  STOCK MARKET In an effort to balance overall investments in the market, the Securities and Futures Commission has placed restrictions on the issuing of warrants in the electronics sector

  • By Stanley Chou / STAFF REPORTER
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  After strongly encouraging the local mutual fund industry to launch low-priced stock funds recently, the Securities & Futures Commission (證期會) has initiated a policy to restrict securities companies issuing stock warrants for the electronics sector (電子股認購權証).

  "Any securities company that has already issued electronics stock warrants cannot issue further warrants [on electronics] until they have done so for other industries," SFC deputy chairman Chu Jaw-chyuan (朱兆銓) said yesterday. "We need to have balance in the market."

  It has been rumored for the past month that curbs were going to be placed on the issuance of electronics share warrants, but SFC chairman Lin Tzong-yeong (林宗勇) has been quick to deny their validity until his deputy spoke yesterday.

  "Any securities company that has not yet issued electronics share warrants will be permitted to do so. [But] anyone that has already issued electronics share warrants has to issue a stock warrant for other industries, such as finance, before being allowed to issue an electronics share warrant again," Chu said.

  "The purpose of this measure is to balance the concentration of electronics share warrants in the market," Chu explained. "The securities industry should diversify products in order to give investors more choices."

  There are currently 20 stock warrants in the market issued by eight securities companies, including International (國際), Capital (群益), Fubon (富邦) and Polaris (寶來), and 90 percent of the warrants are wholly or partially connected to electronics shares. The only two exceptions are the stock warrants of Formosa Plastics (台塑) and Nan Ya Plastic (南亞), according to Core Swire Securities (京華證券).

  Analysts said that when a securities company issues a stock warrant, it will normally buy a certain position of that stock for hedging. If the stock price falls and there is no need for hedging, it will dump its warrants. If there are too many stock warrants concentrated in a certain industry, when the stock market experiences a drop, the existence of stock warrants could compound the selling pressure. This is one of the SFC's main concerns.

  A warrant is a type of security that entitles the holder to buy a proportionate amount of common stock at a specified price, usually higher than the market price at the time of issuance, at a later date. Warrants are freely transferable and are traded on the exchange. Companies like them because they allow the quick infusion of capital, while investors like them because they can make a profit on the spread between the original and selling price when the warrants mature.

  The question mark over warrants comes just as the SFC has been drumming up support among mutual fund companies to invest in low-priced stocks, and it is uncertain whether the new curbs will have an impact.

  Fortune Investment (寶泰) and Jardine Fleming (怡富) have already submitted their applications for launching low-priced stock funds. Ten other fund companies are also said to be interested in launching this type of fund.

  Mainstream investment in the stock market has recently been focused on electronics and plastics shares, an executive from a local fund company said. Since it is already very difficult for fund companies to raise enough money in their electronics stock funds, it will certain be difficult to raise money in the so-called asset replacement fund (資產重置基金).

  Many fund companies are only considering such a move and are likely to eventually give up the idea to avoid the embarrassment of failing to raise enough money after launching low-priced stock funds.

  For your information

  The SFC's rationale

  * Warrants give the holder the right to buy stock at a certain price at a future date, so if the stock price drops, warrants become less attractive * If there are too many warrants outstanding in one sector, it will increase selling pressure when the market is falling
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