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  • Writer's pictureTeam Mindbaux

Hindenburg bet against Adani puzzles U.S. short sellers

Hindenburg's bet has been lucrative so far. Its allegations, which the Indian conglomerate has denied, have wiped out more than $80 billion of market value from its seven listed companies.

Institutional investors must disclose their short positions upfront, and foreign investors have other restrictions and registration requirements.


When Hindenburg Research revealed a short position in Adani Group last week, some U.S. investors said they were intrigued about the actual mechanics of its trade because Indian securities rules make it hard for foreigners to bet against companies there.


Hindenburg's bet has been lucrative so far. Its allegations, which the Indian conglomerate has denied, have wiped out more than $80 billion of market value from its seven listed companies and knocked billionaire Gautam Adani from his perch as the world's third-richest man. On Wednesday, a $2.5 billion sale of shares by one of its companies Adani Enterprises, was called off.


The short seller has said it held its position, which profits from the fall in the value of Adani Group shares and bonds, “through U.S.-traded bonds and non-Indian-traded derivatives, along with other non-Indian-traded reference securities.” But it has revealed little else about the size of its bets and the kind of derivatives and reference securities it used, leaving rivals wondering 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 the method it used to place its bets 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

Typically, investors who want to bet that the company’s stock will fall borrow shares in the market and sell them, hoping to repurchase them at a lower price, in practice called short selling.


Short sellers like Hindenburg like to build positions quietly before unveiling their thesis about the company to maximise profits. Discretion is necessary for them, as word of their presence in the stock sometimes can be enough to cause the shares to fall.


In India, however, securities rules make it hard to build positions quietly. Institutional investors must disclose their short positions upfront, and foreign investors have other restrictions and registration requirements.


With the Adani Group, there are added complications: the shareholding is concentrated in the hands of the Adani family, and its shares do not trade on exchanges abroad.


Nathan Anderson, Hindenburg’s founder, has been coy even with peers about his bet against Adani. 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.


Cracking the code of how Hindenburg made the trade could lead to more short sellers taking positions against Indian companies, which have been rare, analysts said.


“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.


DERIVATIVE TRADES

Reuters could not learn details of Hindenburg’s trades. But several bankers familiar with trading in Indian securities said the more profitable piece of the short seller’s bet would likely lie in the derivative trades it had placed.


Some of Adani’s U.S. dollar corporate bonds US00654GAB95=TE, XS2383328932=TE, US00652MAJ18=TE fell 15-20 cents in the days after the report was released, which would make that bet profitable.

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