February 1 (Portal) – When Hindenburg Research last week revealed a short position in the Adani Group, some US investors said they were intrigued by the actual workings of their trade because Indian securities rules make it difficult for foreigners to bet against companies there .
Hindenburg’s bet has been lucrative so far. His allegations, which the Indian conglomerate has denied, have wiped out the market value of its seven listed companies by more than $80 billion and unseated billionaire Gautam Adani as the third richest man in the world. A $2.5 billion stock sale by one of its companies, Adani Enterprises ADEL.NS, was canceled on Wednesday.
The short seller said he has maintained his position, which is benefiting from the decline in the value of Adani Group’s stocks and bonds, “through US-traded bonds and non-India-traded derivatives and other non-India-traded benchmark securities.” But it has revealed little else about the size of its bets and the types of derivatives and reference papers it has used, leaving competitors wondering how the trade worked.
“I wanted to short it myself but couldn’t find an opportunity with my prime broker,” said Andrew Left, founder of Citron Research, citing Adani Enterprises and others.
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Hindenburg declined to comment to Portal on the method it used to place its bets against Adani. Adani Group and the Securities and Exchange Board of India (SEBI) did not respond to a request for comment.
HEAVY TO SHORT
Typically, investors who want to bet that the company’s stock will fall borrow shares in the market and sell them in hopes of buying them back at a lower price, in a practice known as short selling.
Short sellers like Hindenburg like to quietly build positions before disclosing their thesis about the company in order to maximize profits. Discretion is necessary for them as news of their presence in the stock can sometimes be enough to cause the shares to drop.
In India, however, securities regulations make it difficult to take positions unnoticed. Institutional investors are required to disclose their short positions in advance, and there are other restrictions and registration requirements for overseas investors.
There are further complications at the Adani Group: the holding is concentrated in the hands of the Adani family and its shares are not traded on foreign stock exchanges.
Nathan Anderson, the founder of Hindenburg, was shy of his peers about his bet against Adani. Left and Carson Block, founder of Muddy Waters Research and another prominent short seller, told Portal that congratulatory letters they sent Anderson received only one word – “thank you” – when they normally engaged in technical discussions.
Cracking the code of how Hindenburg conducted the trade could lead to more short sellers taking positions against Indian companies, which has been rare, analysts said.
“Once these things (short seller attacks) start, there are others who might check,” said Amit Tandon, managing director of proxy and governance firm Institutional Investor Advisory Services (IiAS) in India.
DERIVATIVE TRADING
Portal could not get any details about Hindenburg’s dealings. But several bankers familiar with trading Indian securities said the more profitable part of the short seller’s bet would likely come in the derivatives trades he placed.
Some of Adani’s US dollar corporate bonds fell 15 to 20 cents in the days following the report’s release, which would make this bet profitable.
But there are limits. Overall, only a few billion dollars in bonds are outstanding and they are not easy to borrow, a debt banker said.
A more profitable way, these bankers said, would be to place the bet through participation certificates, or P-notes, which are lightly regulated offshore derivatives based on shares in Indian companies.
The companies that create the P-Notes are registered with the Indian Securities and Exchange Commission, but anyone can invest in them without having directly with SEBI. An investor may also use intermediaries to disguise its position.
In addition, the market for P-notes is large. Billions of dollars worth of P-notes are traded every year, regulatory data shows, making it possible to place big bets, the bankers said.
(This story has been refiled to add the omitted word “to” in the leading paragraph.)
Reporting by Shankar Ramakrishnan, Svea Herbst-Bayliss and Carolina Mandl; additional reporting by Jayshree Pyasi in Mumbai and Anshuman Daga in Singapore; Edited by Paritosh Bansal and Anna Driver
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