© Reuters. FILE PHOTO: Indian billionaire Gautam Adani speaks during a groundbreaking ceremony after the Adani Group completed the purchase of the Port of Haifa at the Port of Haifa, Israel, January 31, 2023. REUTERS/Amir Cohen/Photo by archive
By Shankar Ramakrishnan, Svea Herbst-Bayliss and Carolina Mandl
(Reuters) – When Hindenburg Research revealed a short position in the Adani Group last week, some American investors said they were intrigued by the actual mechanics of its trading, because Indian securities rules make it difficult for foreigners to bet against companies there.
Hindenburg’s gamble has been lucrative so far. His allegations, which the Indian conglomerate has denied, have wiped more than $80 billion off the market value of his seven publicly traded companies and knocked billionaire Gautam Adani from his position as the world’s third-richest man. . On Wednesday, a $2.5 billion sale of shares by one of his companies, Adani Enterprises, was called off.
The short seller has said he maintained his position, which benefits from the fall in the value of Adani Group stocks and bonds, “through US-traded bonds and non-Indian-traded derivatives, along with other benchmark securities not traded in India. But he has revealed little else about the size of his bets and the type of derivatives and benchmarks he used, leaving rivals wondering how the deal worked.
“I wanted to short it myself, but I couldn’t figure out how to do it with my main broker,” Citron Research founder Andrew Left said, referring to Adani Enterprises and other companies.
Hindenburg declined to comment to Reuters about the method he used to bet against Adani. Adani Group and the stock market regulator, the Securities and Exchange Board of India (SEBI), did not respond to a request for comment.
DIFFICULT TO SHORT
Investors who want to bet that the company’s shares will fall typically borrow shares in the market and sell them, hoping to buy them back at a lower price, in a practice called short selling.
Short sellers like Hindenburg like to build positions quietly before revealing their thesis about the company to maximize profits. Discretion is necessary for them, as the news of their presence on the stock market can sometimes be enough to send the stock crashing.
In India, however, securities rules make it difficult to build positions quietly. Institutional investors are required to disclose their short positions in advance and there are other restrictions and registration requirements for foreign investors.
With the Adani Group there are added complications: the shareholding is concentrated in the hands of the Adani family and its shares are not listed on foreign stock markets.
Nathan Anderson, the founder of Hindenburg, has been coy even with his peers about his bet against Adani. Left and Carson Block, the founder of Muddy Waters (NYSE:) Research and another prominent short seller, told Reuters they received a one-word “thank you” response to their congratulatory messages to Anderson, when they usually they talked about business. .
Cracking the code of how Hindenburg made 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 be watching,” said Amit Tandon, managing director of proxy and governance firm Institutional Investor Advisory Services (IiAS) in India.
DERIVATIVES OPERATIONS
Reuters was not able to learn details of the Hindenburg exchanges. But several bankers familiar with trading Indian equities said the most profitable part of the short seller’s bet would likely lie in the derivative trades he had made.
Some of Adani’s US dollar corporate bonds fell by 15 to 20 cents in the days after the report was released, which would make that bet profitable.
But there are limits. Only a few billion dollars in total bonds were outstanding and not readily available to borrow, a debt banker said.
A more profitable way, these bankers said, would be to bet through participating notes, or P-notes, which are lightly regulated offshore derivatives based on shares of Indian companies.
The entities that create the P-notes are registered with the Indian stock market regulator, but anyone can invest in them without having to register directly with SEBI. An investor can also use intermediaries to hide his position.
In addition, the market for P notes is large. Billions of dollars in P notes are traded every year, regulatory data shows, making it possible to place big bets, the bankers said.