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Hindenburg bets against India’s Adani puzzle rival US short sellers

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

Hindenburg̵[ads1]7;s efforts have been lucrative so far. Its claims, which the Indian conglomerate has denied, have wiped more than $80 billion in market value from the seven listed companies and knocked billionaire Gautam Adani from his place as the world’s third-richest man. On Wednesday, a $2.5 billion sale of shares by one of the companies, Adani Enterprises ADEL.NS, was called off.

The short seller has said it held its position, which is profiting from the fall in the value of Adani Group shares and bonds, “through US-traded bonds and non-Indian-traded derivatives, along with other non-Indian-traded benchmarks.” But the has revealed little else about the size of its bets and what kind of derivatives and benchmarks it used, leaving rivals wondering how the trade worked.

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

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


Typically, investors who want to bet on the company’s shares falling will 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 like Hindenburg like to build positions quietly before revealing the thesis of the company to maximize profits. Discretion is necessary for them, as word of their presence in the stock can sometimes be enough to send the stock tumbling.

In India, however, securities regulations make it difficult to take positions. 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 there are additional complications: the shareholding is concentrated in the hands of the Adani family and the shares are not traded on exchanges abroad.

Nathan Anderson, Hindenburg’s founder, has been cautious even with his peers about his bet against Adani. Left and Carson Block, the founder of Muddy Waters Research and another prominent short-seller, told Reuters they got a one-word response — “thank you” — to congratulatory messages they sent to Anderson, when they usually talked shop.

Cracking the code on 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 are others who can look,” said Amit Tandon, managing director of proxy and management firm Institutional Investor Advisory Services (IiAS) in India.


Reuters could not find out details of Hindenburg’s dealings. But several bankers familiar with trading in Indian securities said the more profitable part of the short-seller’s efforts were likely to be in the derivatives trades it had placed.

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

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

A more profitable way, these bankers said, would be to place their bets 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.

In addition, the market for P notes is large. Billions of dollars worth of P-bills are traded each year, regulatory data show, making it possible to place big bets, the bankers said.

(This story has been re-filed to add dropped word ‘to’ in 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: Thomson Reuters Trust Principles.

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