Before publicly announcing their argument for shorting the firm to maximise profits, short sellers like Hindenburg like to develop stakes in a stealthy manner, like they did with Adani Group.
A damning analysis by US-based short seller firm Hindenburg Research caused the stocks of the Adani Group companies to lose a combined market value of more than $100 billion over the course of the past week. The US company will profit, however, when the conglomerate’s foreign bonds decline rather than when its stock declines.
Using US-traded bonds and non-Indian-traded derivative instruments, Hindenburg Research claimed to hold short positions in Adani Group entities, but it hasn’t revealed the magnitude of its wagers or the types of derivatives and reference securities it utilised.
According to Hindenburg’s research, the seven listed Adani group companies have an 85% downside on a fundamental basis because of their exorbitant prices.
The entire group is now on shaky financial ground since “key listed Adani companies have also taken on enormous debt, including pledging shares of their inflated stock for loans,” Hindenburg claimed.
What are these instruments of debt?
After they are issued, bonds can be purchased and sold on the secondary market. The majority of bonds are traded over the counter between sizable broker-dealers operating on behalf of their clients or themselves, while certain bonds are traded openly through stock exchanges.
Derivatives of Indian corporations that are traded outside of India are referred to as non-Indian-traded derivatives. Derivatives are financial contracts that derive their value from a collection of assets or underlying assets. Derivatives’ values are constantly fluctuating based on market conditions. Before Hindenburg Research began focusing on this type of debt, companies issued these instruments as a way to get money from foreign investors because of their lower interest rate. Adani Group’s companies were no different.
How did Hindenburg manage to accomplish this?
According to Sebi, short selling is the act of selling a stock that the seller does not currently possess. The ability to short sell is available to all kinds of investors, including retail and institutional ones. With short selling, a person sells a borrowed stock in the hopes of subsequently purchasing it for a lower price and profiting.
Before publicly announcing their argument for shorting the company to maximise profits, short sellers like Hindenburg like to secretly amass stakes, like it did with Adani Group. Short sellers must exercise discretion since even the slightest hint that they are involved in the stock could send the price plummeting.
Rules, however, make it challenging to quietly consolidate positions in India. There are additional restrictions and registration requirements for overseas investors, institutional investors must report their short positions upfront, and there are other constraints.
Some bankers told Reuters that using participatory notes, or P-notes, which are offshore derivatives with little regulation that are based on the shares of Indian companies, would be a profitable way to place the bet.
However, anyone can invest in them without directly registering with Sebi because the firms that issue the P-notes are registered with that organization’s stock market regulator. A shareholder can conceal their position by using intermediaries as well.
How are the bonds issued by Adani trading right now?
As notes from Adani Green Energy fell to a historic low on Thursday, the dollar bonds issued by companies within the Adani Group continued to lose value.
Bonds issued by Adani Green that mature in September 2024 suffered the most losses, dropping 11.69 cents to 60.56 cents, their lowest price ever.
The day after the company’s flagship Adani Enterprises Ltd. postponed its $2.5 billion share sale, the conglomerate’s dollar-denominated bonds continued to lose money. Adani Ports’ bonds, which have a maturity date of July 2027, fell 5.84 cents to 72.17 cents, their lowest price since October 2018.
Bonds issued by Adani Transmission, Adani Electricity Mumbai, and Adani Ports and Special Economic Zone were all trading at lower prices.