According to Bloomberg, a trader who sold $1 million worth of Adani Enterprises stakes at the market’s opening on February 1 and then purchased them again at the close of the day after the record drop would have made nearly $280,000, excluding commissions and transaction expenses.
The constraints of the practice in the country and the uniqueness of the company conglomerate itself have been emphasized by Hindenburg Research’s choice to solely short Adani Group stocks outside of India.
The Indian government has put a variety of constraints on short selling, such as forcing institutional investors to notify the stock market in advance of any planned trades and mandating that retail investors liquidate positions each day. Additionally, they uphold the widely favored prohibition on naked shorting, the practice of investors selling shares without first borrowing them,
Making bets against the equities of the Adani Group again has some unique challenges. Due to the lack of institutional investors and the relatively low free float of all the Indian-listed companies, there are fewer shares available for short sellers to borrow, raising the cost of doing so. According to data gathered by Bloomberg Intelligence, nine out of the ten equities are held at least 60% by founders and controlling shareholders.
According to information collated by Bloomberg, dealers paid rupees 8 (10 US cents) each to borrow Adani Enterprises stock on January 16, the most recent date for which data is available. Comparatively, shares of Reliance Industries Ltd., the enormous stock by market importance in India, averaged 0.22 rupees in January.
But even for other equities, Kamal Visaria, the founder trustee at Mumbai’s Visaria Family Trust, claims that the borrowing and lending industry in India is still quite small.
In comparison to comparable mechanisms in more developed markets, India’s stock loan and borrowing market “hasn’t evolved at the pace at which it was supposed to and is still extremely modest,” the analyst added.
According to the Partners of S3, a source of financial data, shares borrowed in the US at the end of the previous quarter accounted for roughly 4.2% of the market’s total float. Contrarily, Visaria added, volumes in India’s $3.2 trillion cash equity market are minimal, and the results segment is more fluid and frequently used by traders.
Multi-Legged Approach
Short sellers may like using derivatives because it can be difficult to short Adani equities in India.
To profit from a decline in the stake of four of the Adani group stocks recorded in India, namely Adani Industries, ACC Ltd, Adani Ports & Special Economic Zone Ltd, and Ambuja Cements Ltd, an investor based in India can either purchase put options, sell calls, sell futures, or develop a multi-leg options strategy.
Amid the turmoil, volumes for options tied to Adani equities have increased. Last week, the amount of open curiosity on such Adani Enterprises-related contracts or unresolved positions reached a record high. Although the SEC loosened requirements in 2019, it can still be challenging to obtain a Foreign Investor Portfolio license, which is required to trade onshore derivatives.
Effortful Process
Soren Aandahl, who founded the short-selling business LLC Blue Orca Capital and is well-known for his bets on Hong Kong-listed businesses, described the procedure as “extremely arduous.” “Getting that license permission from a regulator is quite challenging.”
As an alternative, offshore futures can be exchanged in Dubai and Singapore, however, the liquidity in those products can be quite low. By late Friday, almost 216,800 lots of February delivery contracts for Adani Ports & Special Economic Zone had been exchanged on the National Exchange Stock of India Ltd., as opposed to just 90 lots in Singapore.
Conclusion
Trading in India has many challenges, according to Aandahl. “Unfortunately, India has a lot of larger corporations that you can deal with through offshore futures exchanges, but even with that, the liquidity isn’t great.