Delhi High Court Restrains Short Seller’s Report

Short selling involves the selling of a security that an investor or a trader does not have in possession when placing the sale order in the system. A short seller borrows the security and then sells it in the market with an expectation that it can buy back the same security at a later date for a lower price than it was sold for. The difference in the selling price and the
buying price would be the profit earned on short selling.

Short sellers typically issue reports indicating governance concerns in companies and simultaneously short the stock of those companies, thereby earning a short-term profit based on the consequent decline in their stock value. Such short sellers’ attacks have occurred in the past in Indian companies as well, as discussed here. While short sellers perform an important governance role by highlighting concerns with companies, their reports are quite often rebuffed by the companies who even initiate criminal action against short sellers. In that sense, the impact of the short sellers’ efforts is quite mixed.

In this context, it is interesting to consider an order of the Delhi High Court (hat-tip: Bar and Bench) in Ebixcash World Money Limited v. Fraser Perring. The plantiff, Ebixcash, approached the Court on the ground that the defendant, part of the Viceroy Research Group, and holding stock in Ebixcash, issued a report that allegedly contained false information regarding Ebixcash. In such circumstances, the companies tend to plead for defamation on the ground of falsehoods spread by the short sellers. In the present case, Ebixcash raised the plea that the Viceroy Group “have falsely and maliciously made statements to the public that [Ebixcash] are involved in illegal and unlawful transaction[s]”. Ebixcash seems to have been able to punch holes in the report and, in particular, that the US Securities and Exchange Commission and the Internal Revenue Service had conducted investigations against Ebixcash, which were found to be untrue. Hence, the Delhi High Court ordered the removal of the relevant information from the website of the Viceroy Research Group. Newspaper reports indicate that such an order was also passed against Twitter and Google requiring them to remove the articles published by the Viceroy Research Group on Ebixcash. This is reportedly a pioneering strategy in India in obtaining injunctive relief against short seller assaults.

It appears that Ebixcash has won the first round of the battle. Whenever companies become the subject to attacks by short sellers, they follow a multipronged defensive strategy. One would be to retort the allegations made by the short seller’s report. The other would be to initiate a defamation action, as Ebixcash has currently done. This would at least help obtain a temporary reprieve. In the past, where short seller attacks have caused a significant impact on the company’s stock price and operations, such companies have relied upon support from outside reputable investors such as white knights to demonstrate trust in the stock and continued reliance on the company’s management. It remains to be seen what steps are taken next in this battle, both on the legal and commercial fronts.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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