The Indian authorities have placed a number of restrictions on short selling, including requiring institutional investors to disclose planned transactions to the stock exchange before they are executed and having their retail counterparties close positions every day. . They also enforce the globally preferred ban on nude shorts, the practice in which investors first sell stocks they haven’t borrowed.
Shortening the Adani Group also comes with its own particular difficulties. All listed entities in India have relatively low free float and few institutional investors, which means there is a shortage of shares for short sellers to borrow and are therefore more expensive. The founders and majority shareholders own at least 60% in nine of the 10 stocks, data compiled by Bloomberg Intelligence shows.
The fact that there was little shorting of Adani’s shares meant that there was hardly any short covering that would normally limit a stock’s decline.
“The delicious irony is that shares of Adani companies are plunging hard or being limited to the downside in part because India makes it very difficult to sell short in the first place,” the investment specialist said last week. short Scorpion Capital Partners in a tweet. There was “nobody to intervene on the other side,” he said.
Hindenburg made it clear in the release of his report that all of his positions were abroad. Shorts in Adani Group companies were held across US-traded bonds and non-Indian-traded derivatives, along with other non-Indian-traded benchmarks, he said. The short seller declined to comment on his decision to use offshore instruments when contacted by Bloomberg.
In theory, the potential gains are huge. A trader who sold $1 million shares of Adani Enterprises Ltd. at the open on February 1 and bought them back at the end of the same day after the record 28% drop would have made about $280,000, excluding fees and transaction costs. , according to Bloomberg. calculations
Shorting Adani Group shares is much more expensive than betting against some of its Indian peers.
The Adani Enterprises share loan cost traders 8 rupees (10 US cents) each on Jan. 16, the latest figure available, according to data compiled by Bloomberg. That compares with a January average of Rs 0.22 for shares of Reliance Industries Ltd., India’s largest shares by market value.
But even for other stocks, the lending and lending market in India remains small, according to Kamal Visaria, founding trustee of Visaria Family Trust in Mumbai.
India’s equity lending and lending segment “has not matured at the rate expected and is still very small relative to similar arrangements in more developed markets,” he said.
In the US, shares lent amounted to about 4.2% of float value on the market at the end of the last quarter, according to S3 Partners, a financial data provider. By contrast, volumes in India’s $3.2 trillion cash equity market are negligible and the derivatives segment is more liquid and typically used by traders, Visaria said.
Since shorting Adani shares in India can be problematic, short sellers may prefer to use derivatives.
An investor based in India can buy put options, sell calls, sell futures or create a multi-leg options strategy that profits from a drop in shares of four of the Indian-listed Adani group stocks, namely Adani Enterprises, Ambuja Cements Ltd., ACC Ltd. and Adani Ports & Special Economic Zone Ltd.
Option volumes linked to Adani shares have risen amid volatility. Open interest on such Adani Enterprises-linked contracts, or positions yet to be liquidated, hit a record high last week.
‘Very laborious’
However, even to do this, global investors need a Foreign Portfolio Investor license to be able to trade derivatives in the country, which can be difficult to obtain despite the regulator easing the rules in 2019.
“It’s a very laborious process,” said Soren Aandahl, founder of short-selling firm Blue Orca Capital LLC, known for its bets against Hong Kong-listed companies. “It’s very difficult to get license approval from a regulator.”
Alternatively, there are offshore derivatives traded in Singapore and Dubai, but liquidity in those instruments can be extremely thin. About 216,800 lots of Adani Ports & Special Economic Zone contracts for February delivery were traded via the National Stock Exchange of India Ltd. late on Friday, compared with just 90 in Singapore.
“There are a lot of obstacles to operating in that market,” Aandahl said of India. “And unfortunately with India, the ones that can be traded through the offshore futures exchanges tend to be much larger companies, but still the liquidity is not enough. how fantastic”.