Since the American financial research firm Hindenburg Research published a report accusing Adani Group of fraud and market manipulation on Wednesday, the conglomerate has suffered losses amounting to lakhs of crore in market capitalisation.
The trend continued on Friday, even as Adani Enterprises, the flagship firm of the Gautam Adani-led conglomerate, opened its follow-on public offering (FPO) for retail investors. In a statement, Adani Group had alleged on Wednesday that Hindenburg’s report was published with the mala fide intention of damaging the FPO, which is also the largest FPO to ever take place in Indian markets.
Even as the ports-to-power conglomerate dismissed Hindenburg’s accusation as baseless and stale, the American firm has doubled down on its take and even challenged Adani Group to take legal action against them in the US. Now, as the confrontation between a large conglomerate helmed by Asia’s wealthiest person and a research firm reportedly comprised of less than a dozen employees heats up, it is worth reviewing the intentions behind the Hindenburg report.
Shorting Strategy
Hindenburg Research views itself as an investigative organisation that sheds light on man-made disasters in the financial markets. The objective, as stated on their website, is to save unsuspecting victims from financial disasters that are totally avoidable. However, research and criticism are not all that is done at the firm founded by Nathan Anderson in 2017. Hindenburg is confident enough to have its skin in the game.
The American firm is an activist short seller i.e they bet against companies that they find overvalued. Short selling is a market strategy by which one can sell shares that one does not actually own. By predicting a fall to take place in a company’s share, short-sellers borrow the shares from a broker at the current market price. If and when the price does fall, the sellers can then buy the corresponding shares at a lower rate, thus squaring off trade with profit. This counts as a ‘sell high, buy low’ strategy.
This is exactly what Hindenburg intends to do with Adani Group companies as well. The firm has disclosed that they hold ‘short’ positions on Adani securities through derivatives and US-traded bonds. In this manner, when the underlying Adani stocks undergo a fall in their market prices, the short position gives Hindenburg a profit. The larger the fall more will be Hindenburg’s profits.
This is not the first time that Hindenburg is shorting securities that they find overvalued. According to data compiled by Bloomberg, Hindenburg has targetted almost 30 companies in this manner since 2020. The very next day after the investigations are made public, the respective companies have, on average, lost about 15 per cent of their value. This makes the American firm a very successful short-seller.
Last year, the short-seller made a successful deal out of Elon Musk’s well drawn out takeover of Twitter. Once Hindenburg announced their short position on Twitter, the social media platform’s share went from $49.80 to $37.39. Later on, the research firm even took a ‘long’ position on Twitter, making a profit on that trade as well. In this case, they followed a ‘buy low, sell high’ strategy. However, Adani Group is much larger than any of the companies that Hindenburg has targetted so far.
Dragged Down
This is the first time that the American firm has its eyes set on an entity listed in Indian equity markets. In the two trading days since Hindenburg publicised their short position on Adani Group, companies under the group have lost around Rs 4 lakh crore.
Consequently, Gautam Adani has slipped 4 positions on the Forbes’ global real-time billionaires list since the Hindenburg-Adani saga started. He is presently on the 7th position with a net worth of $96.6 billion. According to Forbes, Asia’s richest individual lost 19 per cent of his net worth in the last trading session alone.
Adani Group had accused Hindenburg of sabotaging its FPO prospects with ‘baseless and stale’ arguments. Even before scrutinising the nature of the research firm’s arguments, it is quite evident that the Adani Enterprises FPO has been badly affected, for now. The company, whose ongoing share sale has a lower price band of Rs 3,112, closed at Rs 2762 on the BSE today. This implies that retail investors can acquire the share from the primary market at a price lower than the one offered by the company in the FPO.
The magnitude of Hindenburg’s short position is not clear. But if the market sentiment over the past two trading sessions is anything to go by, the conglomerate led by Asia’s wealthiest man has certainly taken a massive hit. It is also clear that it will take more than just verbal dismissals of allegedly stale arguments for Adani Group to reclaim the market cap it has lost.
