The Big Short against the mighty Adani Group; know how this mechanism works!

The Adani Saga: How Hindenburg Research stands to benefit from the chaos

Bernard Baruch, an American financier and statesman has quoted “A market without bears would be like a nation without a free press. There would be no one to criticise and restrain the false optimism that always leads to disaster.”  

Among all the activities in finance, short selling remains one of the most misunderstood. To many, the practice of selling something you don’t own with the intention of buying it back later at a cheaper price appears abstract. Few baulks at the idea of buying low and selling high but reverse the chronology and it shows confusion.  

The short selling news is hogging the limelight on D-Street after Hindenburg Research’s bruising report accused the Adani Group of pulling off “the largest con in corporate history” and the forensic financial research firm disclosed its short positions on Adani companies.   

What Hindenburg Research does and how they stand to benefit is something that most retail investors either fail or find extremely difficult to comprehend. Simply put, Hindenburg Research specializes in "forensic financial research" which specializes in spotting companies around the globe that are engaged in wrongdoings and frauds.   

The said report has accused the Adani Group of the report alleges as "brazen stock manipulation and running an account fraud scheme for decades.".  

How does Hindenburg Research benefit from this? Being an "Activist Short Seller", Hindenburg disclosed that after extensive research, they took short positions in Adani Group Companies in several ways, however, they have not disclosed actual instruments which were used for short selling. But the methods which are mentioned below were available to the New York based forensic financial research firm.   

It can be done by shorting US-Traded bonds and non-Indian-traded derivative instruments. Corporate bonds which are very much like a loan can be shorted (i.e., sold). Alternatively, one can also buy "credit default swaps" which is also similar to a short position with an anticipation of a company defaulting on their debt repayments.  

The most common method is to short sell using borrowed stock. They can sell the borrowed stock and when it is time to "return" the borrowed stock, they can buy it from the market at a much lower cost and return it against earning robust profits.  

One can also use derivatives to do this. This would mean buying PUT Option. This involves betting a stock's price will fall below a specific level. While using Futures, one can also effectively ride the anticipated directional moves by selling them and buying them later at a lower price.   

Is short selling a modern era term? No, it isn’t! Short selling is as old as markets. For as long as centralised markets have existed, traders have hedged risk and speculated on prices. But because they profit from bad news and exercise such apparent trickery putting on positions, short sellers in the stock market are cast as easy villains.  

More generally, it’s not that easy making money from shorts. According to S3 Partners, a specialist New York-based consultancy that tracks short positions, short selling generated aggregate gains of $300 billion last year as stock markets fell. But that simply offsets some of the $572 billions of losses suffered over the previous three years.   

Hindenburg Research released a report just when Adani Enterprises launched its biggest ever Rs 20,000 crore FPO in India and it took a short position in Adani Group Companies. Well, the ‘hidden’ agenda of the report is clear, which was to extract a large pound of flesh and might be say, they kind of succeeded at it!