Hindenburg bets on rival India’s Adani puzzles US short sellers

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

The Hindenburg bet has been lucrative so far. His claims, which the Indian conglomerate has denied, wiped more than $80 billion in market value from his seven listed companies and ousted billionaire Gautam Adani from his position as the world’s third-richest person. On Wednesday, the $2.5 billion share sale of one of its companies, Adani Enterprises ADEL.NS, was called off.

The short seller said he retained his position, profiting from the fall in the value of Adani Group’s stocks and bonds, “through US-traded bonds and non-Indian-traded derivatives, along with other non-Indian-traded benchmarks.” But he revealed little more about the size of his bets and the type of derivatives and benchmarks he uses, leaving rivals wondering how the trade works.

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

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Hindenburg declined to comment to Reuters on the method he used to place his 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 that a 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 like Hindenburg like to build positions quietly before revealing their case for the company to maximize profits. Discretion is necessary for them, as information about their presence in the stock can sometimes be enough to cause the stock to fall.

In India, however, securities regulations make it difficult to quietly build 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 further complications: 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 colleagues 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 the congratulatory messages they sent Anderson when they usually spoke.

Cracking the code on how Hindenburg executed the trade could lead to more short sellers taking positions against Indian companies, which is rare, analysts said.

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


Reuters was unable to learn details of the Hindenburg’s dealings. But several bankers familiar with Indian securities trading said the more profitable part of the short seller’s bet is likely to lie in the derivatives trades he has placed.

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

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

The more profitable way, these bankers said, would be to make a bet through participation bonds or P-bonds, which are lightly regulated offshore derivatives based on shares of Indian companies.

The entities that issue P-bonds are registered with India’s stock market regulator, but anyone can invest in them without having to register directly with SEBI. The investor can additionally use intermediaries to hide his position.

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

(This story has been revised to add an omitted word “to” in the lead paragraph)

Reporting by Shankar Ramakrishnan, Svea Herbst-Bailis and Carolina Mandel; 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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