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What is short selling? An explanation of the Hindenburg report on Adani

Hindenburg report: The Hindenburg Research report on the Adani Group in India has shocked not only its investors but has had a far-reaching impact beyond the financial circles. The research has had a devastating effect on the group’s company shares listed in two major stock markets of the company, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). This comes just before Adani was to open its ambitious Follow-On Public Offer (FPO) worth ₹20,000 crores in the equity market. While the New York-based research organization claims it is an audacious attempt towards maintaining fair journalism, many are also of the view that Hindenburg has some malicious intentions. The explanation behind these attempts to malign the image being given by many points towards Nathan Anderson, the founder of the research firm, to short-sell Adani’s shares and earn millions if not billions. What is short selling and how it is done is important to understand, but first it is important to understand what the report claims.

What does the Hindenburg report say about the Adani group?

According to the information shared on Hindenburg’s website, the research firm had conducted a two-year-long investigation into the financial activities of the Adani group. The report claims that the Indian conglomerate has been involved in a “brazen stock manipulation” and accounting fraud, over the course of decades, to the tune of INR 17.8 trillion (U.S. $218 billion). 

According to the published report, “Gautam Adani, Founder, and Chairman of the Adani Group have amassed a net worth of roughly $120 billion, adding over $100 billion in the past 3 years largely through stock price appreciation in the group’s 7 key listed companies, which have spiked an average of 819% in that period.” 

Hindenburg claims that they have developed the report, after speaking with dozens of individuals and some of the former executives of the Adani Group, and they had conducted diligence site visits in more than six countries. 

The report further adds, “Even if you ignore the findings of our investigation and take the financials of Adani Group at face value, its 7 key listed companies have 85% downside purely on a fundamental basis owing to sky-high valuations. 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. 5 of 7 key listed companies have reported ‘current ratios’ below 1, indicating near-term liquidity pressure. The group’s very top ranks and 8 of 22 key leaders are Adani family members, a dynamic that places control of the group’s financials and key decisions in the hands of a few. A former executive described the Adani Group as “a family business.”

The publishing of the report was enough to spread panic in the Indian stock market and Adani Group companies witnessed a major fall on January 27, some companies even hitting the lower circuit. 

How much did Adani lose in a single day?

In just two days after the Hindenburg report was made public, the total net worth of Gautam Adani was lost by over $48 billion. The impact was also visible on the stock market as a whole and the BSE Sensex lost over 800 points and settled at 59331 on Friday. 

Shares of Adani Enterprises plummeted by over 18% and Adani Ports came down by 16%. Adani Transmission and Adani Green Energy crashed 19.99% each and Adani Total Gas and Adani Power hit the lower circuit of  20% and 5% respectively.

What is short selling? Who will benefit from the falling Adani shares?

Short selling is a way of earning profits from shares that are expected to fall. The technique is called “shorting” in the trader’s language. Here, the stock traders first sell the stock at the price it is trading in the market, and then when the stock prices fall, they buy the share and the differential amount is their profit. 

The Adani share crash is expected to benefit many stock trading firms and individuals who had knowledge about the report. Hindenburg had earlier reported wrongdoings in more than 16 companies since 2017, as reported on its website. In a similar case from last year, Hindenburg shorted Twitter Inc, and in May again it claimed it was short on Twitter because of its internal developments. 

In the Adani report case, several insiders are claiming Hindenburg would make a profit worth millions from the share price decline. 

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