Are Asian corporations receptive towards short sellers?

This article shall examine some of the issues that sparked off major controversies regarding some of the type of tactics used by short sellers to bring down a company. The issues regarding short sellers were particularly in focus with the latest revelations that prominent short seller, Mr. Carson Block, of Muddy Waters Research, LLC, has Muddy Waters Researchcome out in Friday, May 10, 2013 SALT conference in Las Vegas, where he openly disclosed that he is currently shorting the debt of Standard Chartered Bank, Plc (Stanchart), which is headquartered in the United Kingdom, and has a diversified field of banking operations across the Asia-Pacific region, Africa, China, and the Middle-East. SALT conference is a major event where fund managers, and prominent present and government leaders are invited to speak, and is organised by Sky Bridge Capital, which is one of the prominent private equity/hedge fund Group and has major operations around the world, including United States.

Short-selling is a stock strategy that seeks to sell the security in question through borrowed securities or ‘naked’ shorting (with no securities backing). The potential gains and losses from short selling are unlimited, and is a high risk equity strategy that requires knowledge, skills, and market timing.

In a May 14, 2013 Bloomberg.com article, it referred to Mr. Carson Block’s comments on the May 10 SALT conference event, where he pointed out on Stanchart’s massive loan book exposure, totalling approximately $1.0 billion loan to Samin Tan, chairman of Bumi Plc (BUMI), the coal company with major mining operations in Indonesia, and is now in the centre of a dispute between co-founders Nathaniel Rothschild and Indonesia’s Bakrie family, and loans to Far East Energy Corp. (FEEC) that were singled out as “red flags”. This loan exposure was particularly in focus due to the various uncertainties and methods that were allegedly being used and was said to have consist of various related party transactions that are not fully disclosed fully to BUMI shareholders. On the day of the disclosure, the credit default swaps (CDS), or default insurance credit derivatives quoted for the company jumped by approximately 13.5 percent.

At that similar event in Las Vegas, Mr. Block quoted Stanchart’s management compensation is currently based on loan profitability, and that given the recent signs of China’s slowing economic growth, the bank could face many severe issues regarding loan quality, and he was quoted to have mentioned that China’s economic growth is heading for a slowdown, and Chinese companies could be facing major losses, and forced to liquidate. This could prove quite an issue particularly with Stanchart’s exposure in the region. He also pointed out names such as Qihoo Technology, Inc. (Nasdaq GS: QHOO), a Chinese technology company as an example to monitor, but he personally did not have any short trades placed on QHOO.

With the rising prominence of short sellers such as Mr. Carson Block, and Mr. David Einhorn of Greenlight Capital in the United States, there has been an intense debate over whether Asian regulators and securities exchanges should do something to protect the greater investment community. For example, in Singapore, the Singapore Exchange has allowed openly allowed short selling, but with tight regulations over the reporting of short sale trades, and publication of short sales transactions. There is also a tight scrutiny over unscrupulous short sellers, and spreading false market rumours in order to manipulate the markets. This issue was particularly in focus when Olam International, a prominent international farm products middleman, and a publicly-listed firm in the country, was singled out by Muddy Waters to have allegedly ‘cook’ their accounting books, namely in the pricing and valuation of its commodity products. The company was forced to seek assurance, and following that, there was a massive public relations (PR) campaign to reassure investors, and the public that these were false accusations. The stock was being hammered severely, and was to have survived the ordeal with a massive loan and equity raise, which subsequently restored investor confidence.

However, there seems to be a lack of corporate transparency on the part of the management of Olam, when it scrambled to prevent any further downturn of their stock price. The initial message from Olam did not help to reassure investors, and this causes quite an alarming exit of the stock in late 2012. Had there been a resounding tone of defiance against the accusations, and presenting the evidence that disprove Muddy Waters remarks, the stock price might not have plunged quite a significant fair bit, wiping off billions of dollars in market value.

With this massive event, it comes to many of Asian investors’ minds that short-selling has caused quite a significant impact on the running of public-listed corporations. Several regulators in neighbouring countries, including Malaysia, and Indonesia have not openly and fully embrace short selling. Short selling remains severely restricted, or not fully introduced as an alternative feature to investors, who will like to take some contrarian views on the stock in a legitimate basis. Not many Asian retail investors are fully aware, or have even heard of names such as Mr. Carson Block before the Olam debacle. There is a thought that short sellers have an agenda to deal with in their targeted companies, and that this create a huge discomfort among many investors, especially the ‘long’ investors. However, short selling is essential in keeping the targeted companies in check, and helping the markets to stay functional in terms of its valuation, liquidity and transparency.
The recent moves by Muddy Waters and Mr. Carson Block have exposed many of the controversial issues that Asian corporations have to deal with in their financial disclosures. The role of the short sellers is to help to keep markets in check and is generally believe to be helpful in creating investor awareness. However, there should also be rules and regulations governing short selling. For most of the Asia-Pacific stock markets, with the exception of Singapore, regulators are still quite behind the curve when it comes to allowing short selling to exist in their markets, but in order to protect the interests of the greater investment community, short selling should be seen as a useful mechanism, and a way to ensure market transparency, which still has long ways to improve, particularly for most Asian corporations in their conduct and disclosures of their businesses.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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