Terry Murden: HBOS shareholders braced for fallout as short sellers are revealed

HBOS shareholders face another testing week that will be coloured by the first revelations of who has been short selling the stock.

Those secretive hedge funds and other traders who have been actively selling in the hope of driving the price down will be unmasked tomorrow under the new Financial Services Authority (FSA) guidelines.

As the industry's regulator stresses, there is nothing illegal about short selling, a practice as old as markets themselves, but collectively they have had a dramatic effect on the share price of HBOS and others engaged in raising new equity through rights issues which, by their nature, price new shares at a discount to the market and thereby open up opportunities for traders to make a quick profit.

With no obligation until now to declare their positions publicly they have been able to make a tidy sum, whatever the wider consequences of their actions, and in the case of HBOS it has been so severe that it has prompted action by the regulator.

Whether or not the FSA acted too rashly, and whether it appeared to be favouring the banks over other troubled companies, the early signs are that the short sellers have not gone away.

These are now issues that concern HBOS's two million private shareholders, including 157,000 in Scotland, most of whom are passive investors with no interest in the stock market. But whether they take interest in their investments or not they still qualify for the extra shares on offer and will have the option to buy more, or to sell their rights.

Therein lies the problem for the bank and its underwriters. With household budgets under pressure, how many will forsake their rights? For the average shareholder owning 375 shares it will cost £412.50 to take up the new allocation of two for every five at the rights price of 275p per share. That will be close to many people's monthly mortgage payment.

For those keen to buy, there is uncertainty over the falling price. Even with the new FSA rules in place, the short sellers were at work again on Friday and the price dipped below the rights issue price. At that point it is cheaper to buy the shares in the open market.

But it is not only short sellers who are driving down the price. The bank's fundamentals don't look too attractive either. Warnings of further writedowns and its heavy exposure to the troubled housing and property markets are undermining the shares further and there were a raft of broker downgrades last week that added to the downward pressure.

Will the issue be a flop? Of course, HBOS will still get the £4bn it requires to bolster its balance sheet and any shortfall in the take-up of new shares will be met by the underwriters or, more likely, the sub-underwriters who have agreed to share the risk.

But a flop would send a signal of disapproval to the board and intensify speculation about the need for fresh blood. There is the other danger that the underwriters would dump the unwanted shares on the market, depressing the price further. Some investors may choose to gamble on this outcome to mop up the shares at a bargain price. In the longer run they may be proved right, though many investors will leave well alone until some stability emerges in the bank's key markets.

Questions remain over how £35m was spent

OUR revelations today over the collapse of talks to bring new research jobs to Scotland is linked to the unfathomable accounting rules brought in after the Enron scandal to improve transparency in how companies count their money. For it to have cost jobs and valuable research work seems to be classic case of unintended consequences.

However, there are wider issues surrounding Inverness Medical Innovations, its Stirling subsidiary, and for Scottish Enterprise which was prepared to offer £14.5m to support the transfer of work from the US and Germany.

This firm has received substantial handouts from the taxpayer – some £35m over three years – yet the promise of hundreds of jobs has not materialised. In fact, there have been two rounds of redundancies since April. Its product is still a year from clinical trials, though there had been talk of it reaching the market last year.

No wonder, then, that Scottish Enterprise wanted a guarantee of jobs before handing over the money. That looks like a sensible precaution.

But, as this newspaper said at the time of the original hand-over in 2005, it ought to have minimised its risk in the first place. Despite the firm's assurances on its trading position, and its offer to bring more work to Scotland, questions remain over this project and to the £35m of public money the firm has already spent.