Hindenburg shorted Adani Group’s US-traded bonds and non-Indian-traded derivatives: What are these instruments?
Adani Group firms’ stocks lost combined market capitalisation of over $100 billion in the past week due to a scathing report by US-based short seller firm Hindenburg Research. However, the US firm stands to gain not from stock rout but when the conglomerate’s overseas bonds fall.
Hindenburg Research said it holds short positions in Adani Group companies through US-traded bonds and non-Indian-traded derivative instruments but it hasn’t disclosed the size of its bets and the kind of derivatives and reference securities it used.
The seven listed companies of the Adani group have an 85% downside on a fundamental basis due to sky-high valuations, Hindenburg said in the report.
“Key listed Adani companies have also taken on substantial debt, including pledging shares of their inflated stock for loans, putting the entire group on precarious financial footing,” Hindenburg said.
What are these debt instruments?
Bonds can be bought and sold in the secondary market┬аafter they are issued. While some bonds are traded publicly through stock exchanges, most trade over the counter between large broker-dealers acting on their clients’ or their own behalf.
Non-Indian-traded derivatives refers to derivatives of Indian companies that are traded overseas. Financial contracts that earn their value from a group of assets or underlying assets are called derivatives. Depending on the market conditions, the value of derivatives keeps on changing. Companies issue these instruments as part of raising funds from overseas investors because of their lower interest rate and Adani Group’s firms were no different until Hindenburg Research started targeting this form of debt.
How could Hindenburg have pulled this off?
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.
Short sellers such as Hindenburg like to build positions quietly before unveiling their thesis for shorting the company to maximise profits like it did with Adani Group. Discretion is necessary for the short sellers, as a whiff of their presence in the stock can be enough to cause the shares to fall.
In India, however, rules make it hard to quietly build positions. Institutional investors are required to disclose their short positions upfront and there are other restrictions and registration requirements on foreign investors.
Some bankers told Reuters a profitable way would be to place the bet via participatory notes, or P-notes, which are lightly regulated offshore derivatives based off 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 directly register with Sebi. An investor can further use intermediaries to obscure its position.
How are Adani bonds trading now?
The dollar bonds issued by entities of Adani Group extended losses on Thursday with notes of Adani Green Energy crashing to a record low.
Adani Green’s bonds maturing in September 2024 led the losses, falling 11.69 cents, to 60.56 cents, their lowest since issuance.
The conglomerate’s dollar bonds slipped further into losses on the day after the flagship Adani Enterprises Ltd called off its $2.5 billion share sale. Bonds of Adani Ports, maturing in July 2027, dropped 5.84 cents, to 72.17 cents, their lowest level since October 2018.
The US dollar-denominated bonds of Adani Ports and Special Economic Zone, Adani Transmission and Adani Electricity Mumbai were also trading lower.
With inputs from Reuters
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