[Gaurav is a student at West Bengal National University of Juridical Sciences, Kolkata.]
The order passed by Justice Jayanth Nath of the Delhi High Court on 8 May 2019 is unique and first of its kind where an Indian court has passed an order on the subject matter of ‘short selling’ in the stock market. The major issues, in this case, were whether the publication of the impugned article titled ‘Ebix - Goodwill Hunting: The alchemy of creating Profits’ by the defendant amounted to a violation of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations 2003 (FUTP) and whether the article amounted to defamation. The court granted interim relief in favour of EbixCash directing the removal of the article in the order. The case was finally decided on 5 March 2020, wherein Justice Mukta Gupta upheld the temporary injunction granted by Justice Jayanth Nath, thus converting it to a permanent and mandatory injunction on the publication of the impugned article.
Factual Matrix
The plaintiffs, in this case, are a part of the EbixCash group which is a supplier of on-demand software and e-commerce services to various industries. The defendants are members of Viceroy Research Group, a short-selling research firm. The subject matter of this case pertains to an article published by the defendants on their website. The plaintiffs alleged that the article published by the defendants is malicious, false, without any basis, and defamatory in nature. The plaintiff also stated that the defendants are holding shorting positions in various stocks of the plaintiffs and, through this defamatory article, they want to short squeeze the plaintiff stocks and thereby make profits from it. The court in its interim order held that there is a prima facie case against the defendants. The court stated that some of the statements made in the impugned article are blatantly false, disparaging and without any basis. The court, after hearing the case on the merits, ergo, directed the defendants to delete this article from the public domain.
Analysis of the Interim Order
Part I
Justice Jayanth Nath held that the plaintiff was prima facie able to establish his case that the short seller’s report was without any basis and malicious and therefore granted the requested interim relief. The prima facie standard in Indian injunction law requires the plaintiff to prove that his claim is not manifestly false and has a reasonable chance to succeed on the merits.
In the present case, the defendant in its article mentioned that Ebixcash has been “previously investigated by the IRS: paid settlement. Settled 2008-2013 for US$20.8m” and “previously investigated by the SEC through 2017: investigation findings not released.” This was found by the court to be a prima facie false statement of facts. Similarly, the court found that the statement made by defendants about plaintiff’s practice of “Round trip to Mexico to finance Ebix Paytech” was mala fide and disparaging. It is on these facts that the court directed the removal of the short seller’s article.
This prima facie standard for the grant of interim relief is reasonable as there is no direct regulation on short-selling research firms. There are regulations by the SEBI on unfair manipulative practices like the FUTP. However, the absence of direct regulations pertaining to short sellers, like the ones present for Investment Advisors and Research Analysts, makes it reasonable that interim relief is granted when a prima facie case has been established.
This can be explained by the behaviour of stock market investors that is generally a bit conservative and careful. A general retail investor may not invest when reading something positive about a stock. However, when that same investor comes across a negative piece of information about a company, he is more likely to sell that stock. This is nothing but an illustration of the attitude of a general investor to be safe than sorry. Hence, when short sellers publish something negative about a stock, even if that company does not have any issues, it is likely that there will be a fall in the price of the stock of that company due to the attitude of general investors. Therefore, the short sellers' report should be removed if the company has established a prima facie case against short sellers that their report is blatantly false. This is nothing but balancing the need for having short sellers’ reports with the interests of the company and the investors. The court has rightly marched in to regulate the contest between EbixCash and Viceroy Research Institute.
Part II
In the present case, the author proposes that the article published by the defendants is in clear violation of certain regulations of FUTP.
First, the defendant’s act of publishing the article can be said to be falling under Regulation 2(1)(b)(ii) of the FUTP which provides the definition of ‘dealing in securities’. Secondly, defendant's act of publishing the article also comes under the ambit of fraud for the purpose of these regulations. Fraud under Regulation 2(1)(c)(8) of the FUTP envisages a situation where a statement is published without any reasonable ground for believing it to be true. This covers the present case as the defendants published these statements in their report without legitimate sources.
Further, the act of publication of the article is in violation of Regulation 4(2)(f), Regulation 4(2)(k) and Regulation 4(2)(r) of the FUTP as these provisions are broad enough to cover this matter. The defendant in this case knowingly published certain statements like “Investigation with the IRS” in their article which were not true. This false information was planted by the defendant in the market which may induce trading in the securities. Thus, the defendant's acts violate these regulations.
Now that it is established that defendants are in violation of certain provisions of FUTP, the question arises as to the remedy which the plaintiff has against the defendants. Regulation 11 of FUTP empowers the SEBI to take action against such short sellers in the interest of investors and the securities market. SEBI may take any action mentioned under Regulation 11(1)(a) to 11 (1)(h) or may issue a warning, etc. under Regulation 12. However, a relief like removal of a report from the public domain cannot be envisaged under these regulations even if one assigns the broadest meaning to them. This is where the court comes to the rescue and provides interim relief by directing removal of a report if, in the opinion of the court, the defendants are in violation of FUTP or the published report is false. However, this does not mean that the actions specified under Regulation 11 and 12 are of no help to these companies. It only means that the relief with respect to the removal of an article from the public domain is not envisaged under FUTP.
Summary and Observations
Having discussed the various aspects of the interim order dated 8 May 2019, the author is of the view that the verdict passed by the court was much needed in the Indian securities market. The same is validated by the final judgement passed by Justice Mukta Gupta on 5 March 2020 in favour of the Ebixcash. The author conforms to the view of certain experts that short-selling research firms’ reports are essential for ensuring price efficiency and highlighting governance issues in companies. However, these research firms may be motivated by profit and they might compromise on integrity and objectivity for their own cause. Moreover, the short sellers are largely independent of any direct control as these firms are not regulated by SEBI. Therefore, a check on short-selling research firms’ reports is essential to avoid any manipulation of forces in the securities market. Having said that, it is also settled that the provisions under FUTP after the recent amendments are broad enough to cover false and misleading reports published by these short sellers. However, granting certain reliefs like removal of short sellers’ report is not within the ambit of a regulator like SEBI. This is where the court comes to the rescue of such companies. This case has opened doors to obtain relief against short sellers through Indian courts which is a welcome move and surely in furtherance of the interest of investors.