Adani group in its fresh response to questions raised by Hindenburg Research says the research house is an ‘unethical’ short seller and it published the report to manipulate and depress the stock price and create a false market.
What is short selling?
In Sebi’s words, short selling is the selling of a stock that the seller does not own at the time of trade. All classes of investors, be it retail or institutional investor, are permitted to short sell. In short selling, a short seller sells a borrowed stock in the hope of making money by buying it back at a cheaper price later.
For example, if a short seller expects a Rs 500 stock to fall to Rs 300 level, he can borrow the stock from broker using a margin account and buyback the same stock before the settlement period. The short seller would sell the Rs 500 stock with the hope of buying it back when the price falls to Rs 300. If the stock actually falls, the stock seller buys the share back and closes his position. He earns the difference between the selling price and the purchase price, after deducting margin paid to the broker. This is the main purpose of short selling: Making money when the stock price falls.
But what happens if the stock jumps to Rs 600? In that scenario, the short seller will incur a Rs 100 loss. If the stock continues to rise, the short seller’s loss will rise too. Hence, short selling is largely considered a risky bet where the loss can be unlimited if the stock value continues to surge.
Just another investor
Amid Hindenburg’s report and counter-questions raised over it being a short seller, InGovern Research Services said Hindenburg should be considered as just another market participant who has a motivated view to release a negative report with aim to bring down the stock price.
Short selling, it said is a market mechanism and not wrong and that it is healthy for Indian capital markets. It said shareholder activism should be welcomed in Indian markets and that domestic companies should learn to take such reports in their stride.
InGovern pointed out short sellers are not held in high regard in global capital markets and even in the US, many short sellers, including Hindenburg, were under investigations by the SEC and DoJ. The short sellers are thought to achieve their objectives at all costs, it added.
“Short selling is not shareholder activism. Short sellers are opportunists and very short-term focussed. Such activism could be disruptive for management and companies,” it said.
What Adani group says
In the case of Hindenburg Research, the short seller said it holds short positions in Adani Group companies through US-traded bonds and non-Indian-traded derivatives, along with other non-Indian-traded reference securities.
The Adani group said Hindenburg has so far actively concealed the details of its short positions, the source of its own funding, the “illegality” underlying the synthetic structures by which they hold such positions, or the profit it has made by holding such positions in the group securities.
“Hindenburg’s document is a malicious combination of selective misinformation and concealed facts relating to baseless and discredited allegations to drive an ulterior motive,” Adani group said.
While accusing Hindenburg of conflict of interest, Adani group points out that the research firm’s report intends to create a false market and enables the short seller to book massive financial gain through wrongful means at the cost of countless investors.
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