SINGAPORE:  Short selling of shares could cause unnecessary volatility and chaos in the market, but analysts said this trading method could also enforce stricter self-governance within companies to defend themselves against such attacks.

China Minzhong said it might take legal action against short seller Glaucus Research, and defend its sullied reputation after the Californian short seller accused the vegetable processing firm of fraud and financial irregularities.


The report caused China Minzhong's shares to plunge 48 per cent on Monday before a trading halt was called by the company. 


Experts said China Minzhong needs to respond quickly. 


Robson Lee, a partner of Shooklin & Bok, said: " China Minzhong needs to specifically get down to addressing the issues that were flagged, namely issues concerning their two major customers and their suppliers. These are very factual matters. They concern important matters that were disclosed in the prospectus. 


" The short sellers obviously came prepared, so they (the company's management) need to have a very comprehensive PR exercise, to substantively address and rebut all the allegations, factually, robustly, and allay whatever concerns investors may have arising from these series of allegations."


The impact of fierce attacks by short sellers goes beyond the drop in the company's share prices.


For instance, Glaucus' accusations that China Minzhong may have committed fraud have prompted brokerages like CIMB to cease its coverage of the company. 


Besides seeing its shares crashing 48 per cent to 53 cents after Glaucus released its 49-page report, there was also some collateral damage.


Shares of PT Indofood Sukses Makmur, the largest shareholder in China Minzhong with a 29.3 per cent shareholding, fell as much as 3.4 percent after China Minzhong came under attack.


Some market watchers said there may be more firms coming under scrutiny by short sellers, going forward.


Desmond Chua, a market analyst at CMC Markets, said: " There are 143 China-based companies listed on the SGX (Singapore Exchange) and some of the smaller ones may be due for accounting checks.


" It bodes well for the STI (Straits Times Index) and for China because any accounting differences between Singapore and China filings should be detected, and it should be a good deterrent and a good self-governance check for companies."


Mr Chua added: " Since the stand-off between Olam and Muddy Waters, short selling has gained more popularity in the markets. More retail investors are aware of this term, and they are now looking into options of shorting.


" Markets don't always move in one direction and shorting offers a short-term solution rather than the usual long-term approach of buy and hold."


Some analysts said short sellers could provide some advantages. They could offer additional checks and balances on companies and with the proper disclosure this could complement regulatory efforts in keeping companies in line."


Indeed, since the stand-off between Olam and Muddy Waters, experts said short selling has gained more awareness among investors. There was no outcry for the Monetary Authority of Singapore (MAS) or regulatory forces to step in.


Shooklin & Bok's Robson Lee said: " The Singapore market has come of age and I think investors are no longer jittery. They don't buy and hold, hold in greed and sell in fear.


" I think the market is able to withstand such shocks, but the company in question must be prepared to address all allegations head-on and ensure investors that the company is properly managed."