Short-Selling Adani Stocks Ain’t Easy In India: Here’s Why

India’s authorities have imposed a number of restrictions on short selling, including requiring institutional investors to disclose to a stock exchange before executing planned trades, and requiring their retail counterparts to close positions each day. They also enforce a globally supported ban on naked shorts, the practice where investors sell shares they have not previously borrowed.

Downsizing the Adani group also comes with its own set of difficulties. All Indian-listed entities have relatively low free float and few institutional investors, which means there is a dearth of shares for short sellers to borrow from, and hence they are more expensive. Founders and controlling shareholders hold at least 60% in nine out of 10 stocks, data compiled by Bloomberg Intelligence show.

The fact that there was short selling of Adani shares meant that there was hardly any short-covering which would normally have limited the fall of a stock.

Short-selling specialist Scorpion Capital Partners said in a tweet last week: “The funny irony is that shares of Adani companies are getting heavily shorted or limited partly because India would have made it so difficult to short in the first place.” Is.” To step on the other side,” it said.

The Hindenburg made clear in its report disclosure that its position was all offshore. Shorts on Adani group companies were held through US-traded bonds and non-Indian traded derivatives as well as other non-Indian-traded reference securities. The short seller declined to comment on its decision to use offshore equipment when contacted by Bloomberg.

Theoretically the potential benefits are enormous. According to Bloomberg, a trader who sold $1 million of Adani Enterprises Ltd shares at the open on February 1 and bought them back at the end of the same day after a record 28% drop, would have made about $280,000, excluding fees and transaction costs. Calculation.

Shorting Adani Group shares is much more expensive than betting against some of its Indian peers.

The cost of borrowing stock of Adani Enterprises was 8 rupees (10 US cents) for each of the traders as of January 16, according to data compiled by Bloomberg. This compares with a January average of Rs 0.22 for shares of Reliance Industries Ltd, India’s biggest stock by market value.

But even for other stocks, the market for borrowing and lending in India is small, according to Kamal Visaria, founder trustee of the Visaria Family Trust in Mumbai.

He added that India’s stock-lending-and-borrowing segment “has not matured at the rate at which it was expected and is still very small relative to similar mechanisms in more developed markets.”

In the US, borrowed shares accounted for about 4.2% of market float at the end of the last quarter, according to S3 Partners, a provider of financial data. In contrast, Visaria said volumes in India’s $3.2 trillion cash equity market are negligible and the derivatives segment is more liquid and commonly used by traders.

Given that shorting Adani stock in India can be problematic, short sellers may prefer to use derivatives.

An India-based investor can either buy put options, sell calls, sell futures or create a multi-leg option strategy to benefit from a fall in the four stocks of Adani Group listed in India, namely Adani Enterprises, Ambuja Cements Ltd. , ACC Limited and Adani Ports and Special Economic Zone Limited.

Options volumes on Adani shares have increased amid volatility. Open interest – or positions yet to be settled – on such contracts linked to Adani Enterprises climbed to a record last week.

‘very laborious’

Even doing this, however, requires a foreign portfolio investor license for global investors to be able to trade onshore derivatives, which may be difficult to obtain even as the regulator eases regulations in 2019.

“It is a very painstaking process,” said Soren Andal, founder of short-selling firm Blue Orca Capital LLC, which is known for its bets against Hong Kong-listed companies. “Getting approval for that license from a regulator is very, very difficult.”

Alternatively, offshore derivatives are traded in Singapore and Dubai, but those instruments may have much less liquidity. About 216,800 lots of Adani Ports and Special Economic Zone for February delivery were traded through the National Stock Exchange of India Ltd till late Friday night, while it was only 90 in Singapore.

Andahl said of India, “There are too many barriers to doing business in that market.” He’s brilliant.”

The text of this story is published from a wire agency feed without any modification. Only the headline has been changed.