Explained: What Is Short Selling & How Is Hindenburg's Research Report Hurting The Adani Group

It's been just two days since US-based investment research and short-selling firm Hindenburg came out with its report mentioning how Gautam Adani is pulling the largest con in corporate history.

Hindenburg Report Hurting Adani

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Adani Group ¨C How The World¡¯s 3rd Richest Man Is Pulling The Largest Con In Corporate Historyhttps://t.co/JkZFt60V7f

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¡ª Hindenburg Research (@HindenburgRes) January 25, 2023

Since then, not only has the billionaire lost his position as the world¡¯s third richest person, but even his group¡¯s shares are bleeding heavily.

Hindenburg mentioned that based on its research, it has taken a short position in Adani Group Companies through U.S.-traded bonds and non-Indian-traded derivative instruments. It has accused the Adani Group of accounting frauds, stock manipulations, and money laundering.

But before we go ahead with what this research report mentions and how it is hurting Adani Group, let us first understand what short selling is and why it is done.

What Exactly Is Short Selling?

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Simply put, short selling is an investment strategy with the motive of "buying low and selling high" to cash in some gains. Investors who short-sell stocks expect share prices to drop at some future date and aim to capitalise on this prediction to fetch some profits.

It depends on speculation. To short stocks, traders tend to sell shares that they do not actually own but are instead borrowed from a broker-dealer, thus opening a position for trade. They sell it at the prevailing market rate, thus shorting the position and waiting for prices to drop. To close such a position, traders must eventually buy back the stocks they sold short.

If prices do drop, traders make a profit from the difference between the selling price and the purchasing price. However, if such a prediction for price declination does not materialise and share prices move upward instead, the concerned trader stands to lose. Besides speculation, investors and fund managers also use short selling to hedge the downside risk of holding a long position on securities or any related ones.

Example of Short Selling

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Assume a trader believes that a stock, say XYZ, currently trading at Rs 500, will fall in price in the next month or so.The trader borrows 100 shares of XYZ and sells them to another investor. The trader is now "short" 100 shares since they sold something that they did not own but had borrowed. The short sale was only made possible by borrowing the shares, which, as you must remember, may not always be available if the stock is already heavily shorted by other traders.

Now, a week later, the XYZ company whose shares were shorted reports dismal financial results for the quarter, and the stock falls to Rs 400. The trader decides to close the short position and buys 100 shares for Rs 400 on the open market to replace the borrowed shares. The trader¡¯s profit on the short sale thus turns out to be Rs1,000 (Rs 500 - Rs 400 = Rs 100 ¡Á 100 shares = Rs 10,00,).

In the same scenario as above, suppose the trader did not close out the short position at Rs 400 but instead decided to keep it open in order to profit from further price declines. However, a competitor swoops in to acquire the company with a takeover offer of Rs. 650 per share, and the stock soars!

If the trader decides to close the short position at Rs 650, the loss on the short sale would be Rs 650- Rs 500 = Rs 150 ¡Á 100 shares = Rs 15,000 loss.

Also Read: Adani Group Edges Past Tata Group To Become The Most Valued Indian Business House

What Did The Hindenburg Research Say?

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Hindenburg has uncovered evidence of accounting fraud, stock manipulation, and money laundering at Adani Group that took place over the course of decades. As per the research report, Adani has pulled off this gargantuan feat with the help of enablers in government and a cottage industry of international companies that facilitate these activities.

The group has seven key publicly listed equities (nine in total) with a collective market value of about Rs 17.8 trillion (U.S. $218 billion). [1] It also includes a maze of Adani private companies and family trusts. Through their holdings in the group, Gautam Adani and his family have amassed a paper fortune of over U.S. $120 billion, with over $100 billion of that coming in the past 3 years, largely through the meteoric appreciation of its stock prices.

The conglomerate is involved in a wide array of businesses, largely focused on key infrastructure projects such as the development of ports, mines, airports, data centers, and power generation and transmission.

Highly Overvalued Adani Stocks

The 7 key Adani listed companies have seen their stock prices mysteriously surge over the past 3 years, with most increasing multifold, ranking them individually among the largest companies in India. As per the report, the 7 listed companies of the Adani Group are 85%+ overvalued, even if you ignore Hindenburg's investigation and take the companies¡¯ financials at face value.

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So, even before examining the evidence put forward in this report and based solely on financials taken directly from its companies, the Adani Group appears to be highly overvalued.

Hindenburg

Bloodbath For Adani Shares

Shares of Adani Group¡¯s listed companies have continued to fall. adding to their losses that began on Wednesday when U.S. short-seller Hindenburg Research launched a scathing attack on the conglomerate.

Shares in 7 listed group companies of Adani lost $10.73 billion in market capitalisation in India on Wednesday after Hindenburg said it held short positions in Adani Group and flagged concerns about debt levels and the use of tax havens, as per a Reuters report.

Adani Group has threatened to take legal action against Hindenburg and dismissed the report as baseless. Meanwhile, billionaire U.S. investor

Bill Ackman lent support to the Hindenburg report, saying that he found it "highly credible and extremely well researched."

Amidst this bloodbath, Adani Enterprises kicks off a $2.45 billion secondary share sale today. As of this morning (at the time of writing this report), Adani Enterprises is already down over 5%, Adani Green Energy is down over 15%, Adani Ports and Special Economic Zone is down over 7%, Adani Power is down 5%, Adani Total Gas is down nearly 20%, Adani Transmission is down over 16%, and Adani Wilmar also slipped around 5% today.

Even Adani¡¯s recent acquisitions are bleeding: ACC is down around 8%, Ambuja Cements is down over 10%, and NDTV is down around 5% this morning.

Adani Group has already wiped out Rs 2.37 lakh crore from its market capitalisation in a span of just two days, as per BusinessToday.

Adani Family¡¯s History Of Illegal Activities

As per the Hindenburg's research report, the Adani family has a history of playing roles in illegal activities.

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Gautam Adani¡¯s brother Rajesh Adani has been arrested twice, in 1999 and 2010, for matters unrelated to the diamond trading accusations, according to media reports. The 1999 arrest was over allegations of customs tax evasion, forging import documentation, and illegal coal imports, according to one media report.

The 2010 arrest was linked to a separate allegation of customs tax evasion and undervaluation of imported goods, this time related to naphtha and petroleum products, according to another media report.

Typically, when an executive is alleged to have spearheaded a scheme to defraud the government and is arrested multiple times over allegations of other types of fraud, that executive is terminated. In some countries, they end up in jail.

At Adani Group, they apparently get promoted. Rajesh Adani currently serves as Adani Group¡¯s managing director, described as a "vital" part of the Adani Group, adept at "developing its business relationships."

Gautam Adani¡¯s Brother-In-Law, Samir Vora, was allegedly the ringleader of the same diamond trading scam and was accused of repeatedly making false statements to regulators, per the same DRI fraud investigation. He was later promoted to the position of Executive Director of Adani Australia.

And that's not all.

Gautam Adani?s Elder Brother, Vinod, was a group executive also implicated in the diamond and power equipment scams.

While Adani now denies Vinod¡¯s involvement in the group outside of being a shareholder, in reality he operates a vast empire of Shell companies that funnel assets through Adani Group companies.

Like his younger brother Rajesh, Vinod also allegedly played a key role in the Rs 6.8 billion (U.S. $151 million) diamond trading scandal.

Also Read: 5 Billionaires Closest In Race To Overtake Elon Musk As World's Second Richest

Hindenburg Welcomes Adani Group's Threat To Take Legal Action

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The statement issued by Adani Group has remained silent on the allegations and questions raised by the U.S. short-seller, calling its report outright "baseless."

The Adani Group¡¯s legal head, Jatin Jalundhwala, in a statement, said the report was an "intentional and reckless attempt by a foreign entity" to mislead the investor community and the general public.

Media statement on a report published by Hindenburg Research. pic.twitter.com/ZdIcZhpAQT

¡ª Adani Group (@AdaniOnline) January 25, 2023

Media statement ¨C II on a report published by Hindenburg Research pic.twitter.com/Yd2ufHUNRX

¡ª Adani Group (@AdaniOnline) January 26, 2023

In its report, Hindenburg mentioned, "We have included 88 questions in the conclusion of our report. If Gautam Adani truly embraces transparency, as he claims, these should be easy questions to answer. We look forward to Adani¡¯s response."

Hindenburg also responded to Adani Group's threat to take legal action against them.

Our response to Adani: pic.twitter.com/6NcFKR8gEL

¡ª Hindenburg Research (@HindenburgRes) January 26, 2023

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