Hindenburg Bet Against India’s Adani Baffled Rival U.S. Short Sellers

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 its trade, because Indian securities rules make it difficult for foreigners to bet against companies there.

Hindenburg’s bet has been profitable so far. Its accusations, which the Indian conglomerate has disproved, have swept away more than $80 billion of market value from its seven listed firms and dethroned billionaire Gautam Adani from his perch as the world’s third-wealthiest man. On Wednesday, a $2.5 billion sale of shares by one of its firms Adani Enterprises ADEL.NS was shelved.

The short seller has said it maintained its position, which profits from the drop in the value of Adani Group shares and bonds, “through U.S.-traded bonds and non-Indian-traded derivatives, along with other non-Indian-traded reference securities.” But it has disclosed little else about the size of its bets and the kind of reference securities and derivatives it used, leaving rivals curious about how the trade worked.

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

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

Difficult To Short

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

Short sellers such as Hindenburg like to build positions secretly before revealing their thesis about the company to boost profits. Discretion is essential for them, as word of their presence in the stock sometimes can be enough to prompt the shares to plunge.

In India, however, securities rules make it difficult to secretly build positions. Institutional investors are required to reveal their short positions beforehand and there are other restrictions and registration requirements for foreign investors.

With the Adani Group, there are further complications: the shareholding is concentrated in the hands of the Adani family and its shares do not trade on exchanges abroad.

Nathan Anderson, Hindenburg’s founder, has been evasive even with peers about his bet against Adani. Left and Carson Block, the founder of Muddy Waters Research and another esteemed short seller, told Reuters that they received a one-word response – ‘thanks’ – to messages of congratulations they sent to Anderson.

Working out how Hindenburg did the trade could result in more short sellers taking positions against Indian firms, which have been rare, analysts said.

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

Derivative Trades

Reuters could not acquire details of Hindenburg’s trades. But several bankers conversant with trading in Indian securities said the more lucrative piece of the short seller’s bet would probably be in the derivative trades it had placed.

Some of Adani’s U.S. dollar corporate bonds, slid 15-20 cents in the days after the report was published, which would make that bet lucrative. The dollar bonds issued by entities of India’s Adani Group extended losses early on Thursday, with notes of Adani Green Energy Ltd (ADNA.NS) falling to a record low.

But there are limits. Only several billion dollars of bonds in total were outstanding and they were not readily available to borrow, one debt banker said. A more lucrative way, these bankers said, would be to place the bet via participatory notes, or P-notes, which are moderately regulated offshore derivatives based off shares of Indian firms.

The entities that issue the P-notes are registered with the Indian stock market regulator, but anybody can invest in them without having to directly register with SEBI. An investor can further use intermediaries to conceal its position.

Moreover, the market for P-notes is huge. Billions of dollars worth of P-notes are traded annually, according to regulatory data, making it possible to place huge bets, the bankers said.