Britain's financial watchdog sounded the alarm yesterday over the use of "contracts for difference" to effect "stealth takeovers" of companies.
The Financial Services Authority said it was considering tough new rules on the use of CFDs amid fears that predators have been using them build stakes in target companies without the need to disclose what they are up to.
The concerns were highlighted by the case of Blacks Leisure, where investor Mike Ashley, the entrepreneur behind Sportsworld and the Lillywhites store in Piccadilly, London, is widely believed to have used CFDs as part of his stake-building.
On Thursday he notified the company that he had built up a 29.38 per cent holding.
CFDs are a type of bet that give users exposure to a company's shares. Investment banks that issue CFDs usually buy the underlying shares on which they are based to cover their exposure and will often agree to vote them at the direction of their CFD clients.
Any investor who builds up a stake of more than 3 per cent of a company's shares has to declare it. However, by taking out CFDs they can acquire much larger interests in secret.
They typically only show their hands when they close out the CFDs and then buy the underlying shares from the issuing investment bank.
Last year, the Takeover Panel cracked down on their use by requiring any investor building up a stake of more than one per cent through CFDs to declare their interests. However, the Panel's rules only apply to companies that are already subject to a takeover bid.
The FSA said it feared the use of CFDs was leading to what it called "market failures" and voiced concerns that they were damaging market confidence and could allow so-called "stealth takeovers". The watchdog said it planned to consult with the Takeover Panel on how its rules had worked before making a final decision on how to act in the summer.
Ashley owns Karrimor, which retails through Blacks. On the day he announced his interest, the company said interim pre-tax profits had tumbled from £6.9m to just £100,000 as sales of camping equipment fell.
However, Ashley has built substantial stakes in retailers before, without actually bidding.
Hedge funds have been particularly active in the use of CFDs, as have wealthy private investors with an interest in taking over companies.
The FSA voiced its concerns in a paper on how to implement the EU's "Transparency Directive" into Britain.
The FSA also said it was proposing to allow listed investment trusts and private equity companies to take controlling stakes in businesses in which they invest.Reuse content