THE attack on India’s Adani Group by short-seller Hindenburg Research in late January has not only rocked the country’s financial markets but also raised an interesting issue for companies to contemplate, particularly those trading at lofty valuations – the need to have a contingency plan in place to address market concerns if they should come under a similar assault.

It should be noted at the outset that although short-sellers are short-term traders looking to capitalise on fear and sliding prices by selling first and then buying later to cover the original sale – a reversal of the usual process of buying before selling – their activities are not illegal. In fact, conventional wisdom today is that such players perform important roles in ensuring market efficiency. In its Aug 20, 2015 Regulator’s Column “Focus on clarity and transparency crucial for companies under siege”, the Singapore Exchange (SGX) said regulated short-selling is part of a well-functioning market.

“For a market to function well, bullish investors should be able to buy securities and go long, while bearish investors should have the ability to short-sell. This supports market liquidity and efficient price discovery,’’ said SGX.

Local investors might recall the cases of Olam International, Noble Group and Venture Corp, which were targeted, respectively, by short-sellers Muddy Waters (2012) and Iceberg Research (2015), and an anonymous party online in Venture’s case in 2018. In all three instances, accounting practices were questioned and earnings were claimed to be inflated, possibly fraudulently. Although Olam and Venture eventually emerged unscathed, this was not before their shares underwent tremendous volatility. Noble on the other hand, has collapsed into bankruptcy.

The first point to note is that critical short-selling reports have the potential to wreak havoc as they are usually issued unexpectedly on high-flying companies. If companies are to survive, they have to be prepared and, in this connection, time is of the essence.

In the same 2015 Regulator’s Column, SGX said “a company under attack by short-sellers, or through highly critical reports by research firms and even leading commentators, must be sensitive to the severity of the situation and must provide, as much and as quickly as possible, a full response so that shareholders have a complete picture and can make informed decisions’’.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

Secondly, since attacks are always targeted and specific, then so should be the responses. Motherhood statements like “we are the world’s leading maker of widgets and our track record is second to none’’ or “our accounts have always complied with generally accepted accounting standards’’ simply amount to public-relations speak which the market will immediately interpret as diversionary since they appear to say a lot but actually tell nothing.

Third, a good contingency plan should include immediately halting trading to minimise share price damage. This was endorsed by SGX, which said : “Short sellers, commentators and research firms should be aware that the company is entitled to a right of reply and SGX is willing to allow a halt or suspension pending the preparation of the reply, if necessary, to prevent prices from being distorted by sudden and one-sided criticism.’’

As a difficult 2023 unfolds, a year that will be infused by worry over inflation, rising geopolitical risks and the spectre of recession, having a contingency plan in place in case of a short-selling attack makes eminently good sense.