Daily Management Review

Competing US Short Sellers Perplexed By Hindenburg's Bet Against India's Adani


Competing US Short Sellers Perplexed By Hindenburg's Bet Against India's Adani
When Hindenburg Research disclosed a short position in Adani Group last week, some US investors expressed interest in the actual mechanics of its trade, because Indian securities laws make it difficult for foreigners to bet against Indian companies.
So far, Hindenburg's bet has paid off. Its allegations, which the Indian conglomerate has denied, have wiped out more than $80 billion in market value from its seven publicly traded companies, knocking billionaire Gautam Adani down to third place in the world's richest list. Adani Enterprises, one of its subsidiaries, canceled a $2.5 billion share sale on Wednesday.
The short seller stated that it held its position, which profits from the decline in the value of Adani Group shares and bonds, "via US-traded bonds and non-Indian-traded derivatives, as well as other non-Indian-traded reference securities." However, it has revealed little else about the size of its bets and the derivatives and reference securities it used, leaving competitors in the dark about how the trade worked.
“I wanted to short it myself, but I was not able to find a way to do it with my prime broker,” said Citron Research founder Andrew Left, referring to Adani Enterprises and other companies .
Hindenburg declined to comment to Reuters on how it placed bets against Adani. Adani Group and the Securities and Exchange Board of India (SEBI), India's stock market regulator, did not respond to requests for comment.
Typically, investors who want to bet on the company's stock falling borrow shares from the market and sell them, hoping to repurchase them at a lower price, a practice known as short selling.
To maximize profits, short sellers like Hindenburg prefer to build positions quietly before revealing their thesis about the company. They must exercise caution because word of their presence in the stock can sometimes cause the shares to fall.
However, securities regulations in India make it difficult to build positions quietly. Institutional investors must disclose their short positions upfront, and foreign investors face additional restrictions and registration requirements.
There are additional complications with the Adani Group: its shareholding is concentrated in the hands of the Adani family, and its shares do not trade on international exchanges.
Nathan Anderson, Hindenburg's founder, has been coy about his bet against Adani even among peers. Left and Carson Block, the founder of Muddy Waters Research and another prominent short seller, told Reuters that they got a single word response – ‘thanks’ - to messages of congratulations they sent to Anderson, when usually they would talk shop.
Analysts believe that cracking the code of how Hindenburg executed the trade could lead to more short sellers taking positions against Indian companies, which has been unusual in the past.
“Once these things (short-seller attacks) begin there are others who could be looking,” said Amit Tandon, managing director of proxy and governance firm Institutional Investor Advisory Services (IiAS) in India.
The specifics of Hindenburg's trades were not made public. However, several bankers familiar with trading in Indian securities said the short seller's bet would likely be more profitable in the derivative trades it had placed.
Some of Adani's US dollar corporate bonds,, fell 15-20 cents in the days following the report's release, making that bet profitable.
However, there are constraints. According to one debt banker, there were only a few billion dollars in outstanding bonds, and they were difficult to borrow.
These bankers believe that betting on participatory notes, or P-notes, which are lightly regulated offshore derivatives based on Indian company shares, would be a more profitable option.
The entities that issue the P-notes are registered with the Indian stock exchange regulator, but anyone can invest in them without first registering with SEBI. An investor can further obscure its position by using intermediaries.
Furthermore, there is a sizable market for P-notes. According to regulatory data, billions of dollars in P-notes are traded each year, allowing for large bets, according to the bankers.