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Hindenburg bet against Indian Adani intrigues rival US short sellers

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Feb 1 (Reuters) – When Hindenburg Research disclosed a short position in Adani Group last week, some U.S. investors said they were intrigued by the actual mechanics of its trading because Indian securities rules make it difficult for foreigners to bet against companies there.

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

The short seller said it maintained its position, which is profiting from the decline in the value of Adani Group stocks and bonds, “through bonds traded in the United States and derivatives not traded in India, as well as other benchmark securities not traded in India.” But he revealed little about the size of his bets and the type of derivatives and benchmark securities he used, leaving rivals wondering how the trade.

“I wanted to short it myself, but couldn’t find a way to do it with my primary broker,” said Citron Research founder Andrew Left, referring to Adani Enterprises and others. companies.

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Hindenburg declined to comment to Reuters on the method used to place his bets against Adani. The Adani Group and stock market regulator, the Securities and Exchange Board of India (SEBI), did not respond to a request for comment.


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

Short sellers such as Hindenburg like to build positions quietly before unveiling their business thesis to maximize profits. Discretion is necessary for them, the simple announcement of their presence on the stock market can sometimes be enough to cause the shares to fall.

In India, however, securities rules make it difficult to build positions discreetly. Institutional investors are required to disclose their short positions in advance and there are other restrictions and registration requirements for foreign investors.

With the Adani group, the complications are added: the shareholding is concentrated in the hands of the Adani family and its shares are not traded on foreign exchanges.

Nathan Anderson, the founder of Hindenburg, was coy even with his peers about his bet against Adani. Left and Carson Block, the founder of Muddy Waters Research and another top short seller, told Reuters they received a one-word response – “thank you” – to congratulatory messages they sent at Anderson, when they usually talked shop.

Cracking the code for how Hindenburg traded could lead to more short sellers taking positions against Indian companies, which has been rare, analysts said.

“Once these things (short seller attacks) start, there will be others who may be looking,” said Amit Tandon, managing director of proxy and governance firm Institutional Investor Advisory Services (IiAS). in India.


Reuters could not learn details of Hindenburg’s transactions. But several bankers familiar with Indian securities trading said the most profitable part of the short seller’s bet was likely to be the derivative trades he placed.

Some of Adani’s US dollar corporate bonds fell 15 to 20 cents in the days after the report was released, which would make this bet profitable.

But there are limits. Only a few billion dollars of total bonds were outstanding and they were not readily available to borrow, a debt banker said.

According to these bankers, a more profitable way would be to place the bet via participating notes, or P-notes, which are lightly regulated offshore derivatives based on shares of Indian companies.

The entities that create the P-notes are registered with the Indian stock market regulator, but anyone can invest in them without having to register directly with SEBI. An investor can also use intermediaries to hide his position.

Moreover, the market for P-notes is vast. Billions of dollars worth of P-notes are traded each year, according to regulatory data, allowing for large bets to be placed, bankers said.

(This story has been reclassified to add the word “to” in the main paragraph)

Reporting by Shankar Ramakrishnan, Svea Herbst-Bayliss and Carolina Mandl; additional reporting by Jayshree Pyasi in Mumbai and Anshuman Daga in Singapore; Editing by Paritosh Bansal and Anna Driver

Our standards: The Thomson Reuters Trust Principles.

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