Harassing Short Ideas in India


A former analyst for short-ideas researcher Veritas Investment Research Corporation was arrested by Indian police on Friday.   The arrest came as Indian regulators are finalizing new restrictions on foreign research firms.

Indian police reportedly arrested stock analyst Nitin Mangal after Indiabulls Real Estate Ltd. alleged that he demanded $50,000 to withhold an unflattering research report he wrote for Toronto-based Veritas in 2012, according to articles in the Economic Times and Bloomberg.  Mangal’s lawyer said the action was harassment.

Indian police are also reportedly seeking to extradite from Canada the co-author of the Veritas Indiabulls report.

Veritas published a report in August 2012 authored by Mangal and Neeraj Monga claiming poor corporate governance and lack of disclosure at Indiabulls group companies.  Indiabulls quickly responded by filing criminal charges against the two authors for extortion and forgery.

In August of this year, Veritas and Monga filed a claim in Canadian courts against Indiabulls Real Estate and Indiabulls Housing Finance Ltd. alleging libel, conspiracy and the infliction of economic harm and seeking C$11 million (US$9.7 million) in damages.  Veritas shut down its Indian operations in 2012 and no longer follows Indian companies.

Veritas shook Indian markets in 2011 with harsh reports attacking the financial reporting and governance of large Indian companies.  Veritas put out a report on Reliance Industries and Reliance Commuications in July 2011,  Kingfisher Airlines in September 2011, and DLF in March 2012.  Kingfisher subsequently reported large financial losses and the founder of DLF was banned from the company after regulators found financial reporting irregularities.

Veritas provides earnings quality, forensic accounting and fundamental valuation analysis on about 85 names.  Unlike Muddy Waters or Citron Research, which make money by front-running their research, Veritas relies on subscriptions from institutional investors.  The firm has been in business since 2000, and is primarily staffed with forensic accountants.

Mangal, who set up his own research firm Trudom Investment Research Corporation in 2012, is a chartered accountant who previously worked as an equity analyst at the Indian investment bank Edelweiss Capital.  Co-author Neeraj Monga left Veritas this summer to set up his own investment firm, ANTYA Investments.

As we noted at the time, the Securities and Exchange Board of India (SEBI) announced it was considering regulating independent research analysts in March 2012, apparently in response to the Veritas reports.

In November 2013, SEBI issued a consultation paper on draft regulation requiring foreign independent research firms to set up Indian subsidiaries which would need to be registered with SEBI.  The comment period closed last December and SEBI is reportedly close to finalizing the regulation.

Our Take

It is not uncommon for companies to take legal action against authors of short-oriented research reports.  Gradient Analytics was harassed for years by Biovail and Overstock.com before the charges were settled.  Biovail’s successor firm issued a statement that the original litigation against Gradient was ‘regrettable’.  However, that doesn’t stop publicly-traded companies from trying to suppress negative research and retaliate against equity analysts who hold negative opinions.

What is particularly regrettable is SEBI’s indirect support for suppressing “foreign” research.  It is unclear what protections independent research firms registering under SEBI’s new regulations would have against aggressive actions similar to those taken by Indiabulls.  Firms like Veritas have no incentive to subject their analysts to the legal risks posed by companies such as Indiabulls, not to mention the legal costs.  The net effect of the new SEBI regulation will be to discourage research firms from uncovering questionable practices in Indian companies.  Firms like Veritas will shun the market, leaving the ground open to the “short and shout” firms like Muddy Waters, Citron, and others that make money by driving down prices.  SEBI’s actions designed to police bear cartels will in the end make those cartels more lucrative.


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