ANALYSIS AND VALUATION OF EQUITIES (FIN 347)

SHORT SELLING WHICH CAUSES SIGNIFICANT MARKET DECLINES AND STOCK

MARKET CRASHES.

FACULTY OF BUSINESS MANAGEMENT

DIPLOMA IN INVESTMENT ANALYSIS

JBA1144C

PREPARED BY:

NAME STUDENT ID

AMAR ARIF BIN BAHARUDDIN 2021610664

MUHAMMAD FAIZ BIN MOHAMAD KAMISRUDDIN 2021605278

HAZEEQ AIDEL BIN MD ALIF 2021605814

MOHAMMAD TAUFIK HIDAYAT BIN ABDUL KARIM 2021493354

MUHAMMAD FAWWAZ BIN FAIZOL FADZLI 2021611498

KHAIRUL FAHMI BIN KAMARUDIN 2021605518

PREPARED FOR: DR. ZARITH SOFIA BINTI JASMI

 ACKNOWLEDGEMENT

First and foremost, We would like to express our gratitude to the Almighty, The Most
Beneficent and The Most Merciful, Allah SWT, for providing blessings for us in completing this
report just in time and successfully. Without His blessings, it might be hard for us to finish this
report even though the task is easy to handle. Also, we would like to be grateful to Him for
easing our journey in researching short selling in Malaysia as there is many information that we
can get through various sources such as Google, Books and many more. Without it, there will
be problems with the project.

Secondly, we would like to express my sincere gratitude and special thanks to my beloved
lecturer, Dr Zarith Sofia Binti Jasmi for providing us with such great and complete guidance for
us to complete this report. We felt so honored to receive such great guidance from her by
listening to her lecture and by referring to all the materials provided related to ours. She had
given us appropriate knowledge and examples in order to make us understand and able to
finish and finalize the whole report. Without her guidance and assistance, there might be many
mistakes made in this report. Hence, we hope this report will give full satisfaction to our lecturer
by making sure all the contents and information provided are correct.

2
 CONTENTS
SHORT SELLING..........................................................................................................................4
RULES & REGULATIONS REGARDING SHORT SELLINGS IN MALAYSIA............................ 5
SHORT SELLING CASES............................................................................................................ 7
HOW SHORT SELLING CAN CAUSE MARKET DECLINES AND MARKET CRASH...............9
CONCLUSION.............................................................................................................................10
REFERENCES............................................................................................................................ 11

3
SHORT SELLING
Short selling in equities is a trading strategy employed by investors with the objective of profiting
from a decline in the price of a particular stock. The process begins with the investor borrowing
shares of the desired stock from a broker or another investor who holds the shares in their
account. These borrowed shares are then sold on the open market at the prevailing market
price.
By selling the borrowed shares, the investor effectively takes a "short" position in the
stock. This means they are selling shares they don't actually own with the expectation that the
stock's price will decrease in the future. The investor believes that they can buy back the shares
at a lower price, thus profiting from the price difference.
If the stock's price indeed falls as anticipated, the investor proceeds to repurchase the
same number of shares in the open market at the lower price. These repurchased shares are
then returned to the lender, thereby closing the short position. The difference between the price
at which the investor initially sold the borrowed shares and the price at which they repurchased
them represents their profit.
However, it's important to note that short selling carries inherent risks. Unlike traditional
stock buying, where the maximum potential loss is the amount invested, short selling has the
potential for unlimited losses if the stock price rises significantly instead of declining. In such
cases, the investor would have to buy back the shares at a higher price than the initial selling
price, resulting in a loss.
To engage in short selling, investors typically need to meet certain requirements and
comply with regulations set by the relevant stock exchange or regulatory authorities. These
requirements may include maintaining a margin account, paying borrowing fees or interest
charges on the borrowed shares, and adhering to specific reporting and disclosure obligations.
Short selling can be a complex and speculative strategy that requires careful analysis,
risk management, and market expertise. It is often utilized by investors seeking to hedge their
positions, speculate on market downturns, or take advantage of overvalued stocks.

4
RULES & REGULATIONS REGARDING SHORT
SELLINGS IN MALAYSIA
Short selling is a financial practise that enables investors to profit from a security's decline in
value. This entails borrowing shares of stock from a broker, selling them on the market, and
then repurchasing them at a lower price in order to return them to the broker. The profit is the
difference between the selling price and the purchase price.
However, short selling entails significant risks, such as the possibility of incurring
unlimited losses if the stock price continues to rise. Most nations have regulations and rules
governing short selling activities to mitigate these risks and guarantee a fair and transparent
market. Malaysia is not an exception; its regulators have established specific rules for short
selling activities that investors must adhere to.
In Malaysia, RSS activities are restricted to securities that qualify as Approved
Securities. The Approved Securities currently consist of 70 stocks on the main board based on
specific criteria, including admission to the Official List, average daily market capitalization of
more than RM500 million for the past three months, a minimum of 50 million shares in public
float, and average volume per month traded of more than one million units for the past 12
calendar months.
Every six months, the list of Approved Securities is reviewed, and any modifications to
the criteria are communicated via circulars. This reduces the chances for market manipulation
and other dangers associated with short selling activities.
Investors who wish to short sell any RSS Approved Securities are required to establish a
designated RSS trading account with their broker. Before any short-selling orders can be
executed, they must provide evidence that they are not an associate and that they have
borrowed the RSS Approved Securities or that they are available for borrowing.
To ensure transparency and impartiality in short selling activities, investors must satisfy
certain requirements. For instance, they must establish a distinct Clearing Account for RSS
purposes, adhere to prescribed provisions, and not carry forward any unexecuted orders. In
addition, if the 10% limit is reached, RSS activities for a particular security will be suspended for
four market days. This helps prevent excessive short selling and ensures that normal trading
can continue for the specific security.
In addition, Bursa Malaysia Derivatives Berhad (BFE) displays the percentage of gross
short transactions in real-time in the short sell column of each RSS Approved Security as well

5
as in the stock scoreboard. This enables investors to monitor the volume and value of short
selling for a particular security, which can inform their investment decisions.
While short selling carries significant risks, it can also provide investors with profitable
opportunities. By adhering to the rules and regulations regulating short selling in Malaysia,
investors can engage in this practice in a manner that is fair, transparent, and beneficial to the
entire market.

6
SHORT SELLING CASES
Credit Lyonnais Securities (Singapore) Pte Ltd and CIMB Securities Sdn Bhd Cases (1997)
Credit Lyonnais, CIMB Securities (agent of Credit Lyonnais), and Ng Wai Hong (dealer
representatives of CIMB Securities) were accused with short selling 141,000 Proton Bhd shares
in violation of section 41(1)(a) of the Securities Industry Act 1983, which is penalised under
section 41(2) of the same Act. The Sessions Court convicted all of the accused at the
conclusion of the trial. Credit Lyonnais and CIMB Securities were both fined RM400,000, while
Ng Wai Hong was sentenced to an RM200,000 fine and a year in prison.

SECTION 41 (1) of Securities Industry Act 1983

Subject to this section and any regulations that may be made, a person shall not sell securities
unless, at the time when he sells them– (a) he has or, where he is selling as agent, his principal
has; or (b) he believes on reasonable grounds that he has, or where he is selling as agent, his
principal has, a presently exercisable and unconditional right to vest the securities in a
purchaser of the securities.

SECTION 41 (2) of Securities Industry Act 1983

A person who contravenes or fails to comply with the provisions of subsection (1) commits an
offence and is liable on conviction to a fine not exceeding RM1 million or to imprisonment for a
term not exceeding 10 years or to both.

Ahmad Skhri Ramli Cases (2002)

Ahmad Skhri Ramli shortselling 202 units of AKN Technology Berhad stock short. On January
16, 2002, Ahmad Skhri was accused. At the conclusion of the hearing on 21 December 2006,
he was found guilty of two offences under Section 41(1)(a) SIA 1983 read along with Section
122C(c) of the same Act for assisting PBSN in the short sale of 202 lots of AKN Technology
Berhad shares. Ahmad Shkri was fined RM300,000 (plus 12 months in jail). Ahmad Skhri has
filed an appeal with the High Court against the sentence.

Mohd Tahir bin A. Rahman Cases (2001)

Mohd Tahir assisted Ahyauddin Muhamad in shortselling 80 lots of Transocean Holdings Bhd.
shares . On January 17, 2001, Mohd Tahir was charged.

7
SECTION 122C (c)
Attempts, abatements and conspiracies. A person who– (a) attempts to commit any offence
under this Act; (b) does any act in furtherance of the commission of any offence under this Act;
or (c) abets or is engaged in a criminal conspiracy to commit (as those terms are defined in the
Penal Code) any offence under this Act, whether or not the offence is committed in
consequence thereof, commits such offence and is liable to the penalty for such offence.

Lua Yik Hor Cases (1996)

On May 22, 1996, Lua, a dealer's representative of Seagrott & Campbell Sdn Bhd, was accused
with shortselling 960 units of The North Borneo Timbers Berhad shares. On November 10,
2000, Lua was found guilty of all 30 counts of short selling. He was sentenced to two years in
jail for each of the offences, to be served concurrently. The High Court denied his appeal
against convictions and imprisonment, as well as the prosecution's appeal against punishment,
on February 27, 2009. The convictions and sentences are upheld. On June 23, 2011, the Court
of case denied his case, upholding his convictions and imprisonment.

Yong Kon Fah @ Yong Kong Fah/Mohd Tahir A. Rahman/Chan Wan Kee/Soon Kong Yiaw/Ting
Hsing Tong Cases (2002)
All of these individuals were involved in the sale of shares that they did not possess, which is a
violation of the SIA. They were each fined between RM25,000 and RM105,000.

8
HOW SHORT SELLING CAN CAUSE MARKET
DECLINES AND MARKET CRASH
As mentioned previously, short selling entails borrowing shares of a stock from a broker
and then selling those shares on the market in order to profit from a decline in the price of the
stock. Individual investors can profit from this strategy, particularly in volatile markets or
economic downturns. However, when a large number of investors engage in short selling, it can
put downward pressure on the stock price that can extend to other stocks and even the market
as a whole.
One of the primary ways in which short selling can cause market declines is through the
"short interest ratio." This represents the total number of shares sold short divided by the
average daily trading volume of the stock. A high short interest ratio indicates that a significant
proportion of a stock's outstanding shares have been sold short, which can generate negative
investor sentiment and exert downward pressure on the stock price.
If this negative sentiment spreads to other stocks in the same sector or industry, it can
generate a "contagion effect," in which the decline of one stock leads to the decline of others.
This can be especially problematic if the short interest ratio for many stocks in the same sector
is high, as a decline in one stock can lead to declines in many others, potentially resulting in a
decline for the entire sector.
Another way in which short selling can contribute to market declines is through the
phenomenon of "short squeezes." When the price of a stock begins to rise, short sellers
scramble to cover their positions by repurchasing shares at a higher price. This purchasing
pressure may cause the stock price to rise further, resulting in additional losses for short sellers
and possibly causing a market bubble.
Short selling can also be used to manipulate the market by disseminating false
information about a company or industry to generate negative sentiment and drive the stock
price lower. This type of manipulation can result in sudden and dramatic market declines,
particularly if it is carried out on a large scale.
Although short selling can be a beneficial trading strategy for individual investors, it can
also have negative market effects. Regulators must monitor short selling activity and take the
necessary steps to prevent market manipulation and safeguard investors. Moreover, investors
must be aware of the dangers associated with short selling and exercise caution when
employing this trading strategy.

9
CONCLUSION
In summary, short selling can have a significant impact on market declines and potentially
contribute to stock market crashes. The practice involves investors borrowing shares of a stock
and selling them with the expectation of a price decline. This strategy can create selling
pressure and amplify downward movements in stock prices. However, it is crucial to recognize
that stock market crashes are rarely caused solely by short selling. Various factors, such as
economic conditions, investor sentiment, systemic risks, and unforeseen events, play important
roles in such market downturns. Regulatory measures and safeguards are in place to manage
the risks associated with short selling and maintain market stability. While short selling remains
a controversial practice, its impact on stock market crashes should be considered within the
broader context of market dynamics and the interplay of multiple contributing factors.

10
 REFERENCES

Ferran, E., Moloney, N., & Payne, J. (Eds.). (2015). The Oxford Handbook of Financial

Regulation. Oxford University Press.

11