Explained | Adani Group stocks: What is Hindenburg Research, and how does a short seller operate?

The story so far: U.S.-based short seller Hindenburg Research has hit back at Gujarat-based Adani Group and accused the conglomerate of “holding back India’s future”. Stocks of Adani Group tumbled last Wednesday after Hindenburg Research published a report titled Adani Group: How The World’s 3rd Richest Man Is Pulling The Largest Con In Corporate History, following a two-year investigation, and raised concerns about its “substantial debt”. The financial researcher and short seller also accused the conglomerate of stock manipulation and fraud over decades.

“The timing of the report’s publication clearly betrays a brazen, mala fide intention to undermine the Adani Group’s reputation with the principal objective of damaging the upcoming Follow-on Public Offering (FPO) from Adani Enterprises,” Group CFO Jugeshinder Singh said in a statement after the report was first published.

Following the report, Adani Group said it was mulling legal action against Hindenburg Research – a move that was welcomed by the financial researcher.

On January 29, the conglomerate published a 413-page rebuttal to the allegations levelled by Hindenburg Research, claiming it to be a “calculated attack on India”. “We will exercise our rights to pursue remedies to safeguard our stakeholders before all appropriate authorities and we reserve our rights to respond further to any of the allegations or contents of the Hindenburg report,” the group said.

Also Read | Warning bells: On the Adani saga

In response, Hindenburg Research said that fraud cannot be “obfuscated by nationalism”. “Adani Group has attempted to conflate its meteoric rise and the wealth of its Chairman, Gautam Adani, with the success of India itself. We disagree. To be clear, we believe India is a vibrant democracy and an emerging superpower with an exciting future,” the researcher said in a statement.

Shares of flagship Adani Enterprises rebounded and rose about 9.5% on January 30 but those of other companies of the Adani Group continued to plunge, further extending their losses.

What is Hindenburg Research?

Hindenburg Research was founded in 2017 by Nate Anderson, a chartered financial analyst and a chartered alternative investment analyst.

It describes itself as a forensic financial research company and “activist short seller”. It focuses on analysing accounting irregularities, undisclosed transactions, illegal/unethical business or financial reporting practices. among other issues.

In the past, Hindenburg Research has published reports about irregularities in companies like entertainment company Genius Brands, and electric vehicle manufacturers Nikola Corp. and Mullen Automotive. It also made a bet on a decline in Twitter’s share price in 2022 when Elon Musk first offered to buy the company.

In September 2020, Hindenburg Research alleged that Nikola Corporation was “built on dozens of lies over the course of its Founder and Executive Chairman Trevor Milton’s career”. In its report, the financial researcher claimed that Nikola staged a video called “Nikola One in Motion” which showed the semi-truck cruising on a road at a high rate of speed. The truck was actually rolling down a hill and not moving on its own power – a claim that Nikola later admitted was true, according to a BBC report.

The report was followed by Mr. Milton’s resignation, and news that the S.E.C and Justice Department were looking into the allegations.

In June 2020, Hindenburg Research also claimed that the stocks of Genius Brands, a TV production company, were overvalued and would be worth $1.50 “within a month”.

“The company itself appears to agree with us, believing its shares are worth $0.35 to $1.20 per share, 83%-95% below current levels, based on three financing rounds it completed at those prices last month alone,” Hindenburg Research said. The prediction came true, and the stock price fell to about $1.50 by the end of July 2020. 

Historically, Hindenburg was a series of commercial German passenger aircraft, known for a tragic aviation disaster in 1937 when a Hindenburg airship caught fire and was destroyed during a docking attempt at an airfield in New Jersey, U.S.

What does Hindenburg Research say about the Adani Group?

Findings of the investigation conducted by Hindenburg Research allege that Gautam Adani, founder and chairman of the group, has added over $100 billion to his net worth over the last three years, largely through stock price appreciation in the group’s seven key listed companies, which have spiked about 819% in the same period. The key listed companies under the Adani Group have also taken on substantial debt, including “pledging shares of their inflated stock for loans”. Most top ranks in the company are held by members of the Adani family.

The investigation also notes that the auditor for Adani Enterprises and Adani Total Gas is a small firm called Shah Dhandharia. Researchers found no current website linked to the firm, while historical archives listed that it had four partners and 11 employees.

The report led to a loss of $48 billion across companies of the Adani Group last week.

What is a short seller?

In simple terms, a short seller speculates on the decline in the prices of a company’s stocks. An investor who intends to short sell borrows stocks and sells them on the open market, intending to buy them back later for lesser money once the price declines. A short seller essentially does not own the stocks they are selling, and bets on a decline in their price in the future, hence taking on a huge risk.

Investors intending to short sell a stock usually have to borrow it from a dealer or a brokerage company. This is also why the trader must buy the stocks back from the market, even if they are not making a profit, because the stocks need to be returned to the broker.

The short seller’s profit lies in the money that is left after buying back the stock at a reduced value. However, if the bet doesn’t pay off and stock prices rise, the short seller will incur a loss.

Short selling seems like a profitable investment strategy, but the risks involved are greater than those associated with ordinary stock buying and selling. There is limited scope for making a profit, since the profit margin is only the decline in the value of the stock. However, there is a possibility of losing all your money or incurring a loss if the price of the stock remains constant, or increases.

Who are activist short sellers?

Hindenburg Research has positioned itself as an activist short seller – a financial researcher that investigates companies at length, points out the irregularities and uses its public outreach to criticise a company they have presumed to be overvalued. Activist short sellers hope to make profits when stocks of a company they investigated lose value.

Activist short sellers also run the risk of losing money, since public sentiment is difficult to predict. Social media reach has turned out to be important for short selling activism, according to the law firm White & Case. Hindenburg Research has 2,92,000 followers on Twitter, while Mr. Anderson has over 27,000 followers on his personal Twitter account.