Hindenburg's Adani Bet Puzzles U.S. Short Sellers

Cover Image Attribute: The file photo of Adani Headquarters in Ahmedabad, India. When Hindenburg Research announced last week that it had ta...

Cover Image Attribute: The file photo of Adani Headquarters in Ahmedabad, India.

When Hindenburg Research announced last week that it had taken a short position in Adani Group, some investors in the United States stated that they were curious about the actual mechanics of the trade. This is because, under Indian securities rules, it is difficult for foreigners to wager against companies in that country.

So far, Hindenburg's gamble has proven to be profitable. Its claims, which the Indian conglomerate has denied, have caused a loss of more than $90 billion in market value from its seven publicly traded companies and resulted in billionaire Gautam Adani losing his position as the world's third-wealthiest person. 

On Wednesday, Adani Enterprises canceled its ₹20,000 crores ($2.5 billion) follow-on public offer (FPO), the company said in a regulatory filing late on Wednesday (February 1) evening. Instead, the company will refund the proceeds it received as part of its FPO, bailed out mainly by corporates and foreign investors on Tuesday.

Hindenburg Research has stated that they maintain their stance, which benefits from the decline in Adani Group stock and bond prices, "through U.S.-traded bonds and non-Indian-traded derivatives, along with other non-Indian-traded reference securities." However, they have yet to disclose much information about the magnitude of their investments and the specific derivatives and reference securities they utilized, which has left competitors curious about the mechanics of the trade.

Andrew Left, the founder of Citron Research, stated that he attempted to short Adani Enterprises and other companies but was unable to do so through his prime broker.

When Reuters asked Hindenburg Research for comment on its strategy when betting against Adani, the company declined to provide any. Both, the Adani Group and the Securities and Exchange Board of India (SEBI), which is in charge of regulating the stock market, did not respond to a request for comment.

Hindenburg Research and other short sellers prefer to covertly establish their positions before publicly presenting their negative perspective on a company to maximize gains. They need to be discreet, as simply knowing their involvement in the stock can sometimes result in a decline in shares.

However, in India, securities regulations make it challenging for investors to establish positions quietly. For example, institutional investors must reveal their short positions immediately, and foreign investors have additional limitations and registration requirements. The situation with the Adani Group is even more complicated due to the concentration of shares in the hands of the Adani family, and "its shares do not trade on exchanges abroad."

According to several bankers familiar with trading in Indian securities, the more lucrative aspect of the short seller's strategy would likely be in the derivative trades they have made. For example, Adani's U.S. dollar corporate bonds saw a drop of 15-20 cents in the days following the report's release, which would make a bet profitable. However, the number of bonds outstanding was limited to only a few billion dollars and were difficult to borrow.

These bankers believe that betting on participatory notes (P-notes), offshore derivatives based on Indian company shares and lightly regulated, would offer more profitability. The entities that create the P-notes are registered with the Indian stock market regulator. Still, they can be invested indirectly through intermediaries without requiring direct registration with SEBI. Moreover, according to these bankers, the market for P-notes is vast, with billions of dollars worth traded annually, making large bets possible.

This story has not been edited by IndraStra Global Staff and is auto-generated from a syndicated feed.

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