How a short seller crushed Adani’s share price

Sascha: [00:00:02] From Equity Mates media. This is the dive. I'm your host, Sascha Kelly. Last week, a famous investment firm based in the U.S. called Hindenburg Research released a report that accused the Adani Group, an Indian conglomerate of the biggest con in corporate history. 

Audio Clip: [00:00:19] Looking elsewhere in the markets today, major short seller Hindenburg Research putting out a market moving call on Adani. 

Sascha: [00:00:25] Group. The report triggered a slide in the value of Adani's businesses to the tune of $90 billion, and the accusations Hindenburg levelled were pretty serious. So it's important to note that Adani has strenuously denied these claims. 

Audio Clip: [00:00:41] The words are starting to get hot and heated here, and as you would expect, I mean, they're now the third richest man in the world. His wealth is going up in smoke. 

Sascha: [00:00:49] Adani also pointed out that by releasing this report, Hindenburg made a significant profit. In fact, they're renowned for doing this, actively targeting companies, researching them, releasing reports in order to get a response from fellow investors. How does this work? It's all about short selling. It's Friday, the 3rd of February. And today I want to know what exactly has gone on here with Adani and basically how does short sale work to do this? I'm joined by my colleague here at Equity Mates. It's Darcy Codell. Darcy, welcome to The Dive. 

Darcy: [00:01:24] Thank you, Sascha. Happy Friday.

Sascha: [00:01:26] Happy Friday, indeed. Getting ready for the weekend, but not before we dig into this massive story I'm going to put on the table. There's quite a few elements, so we're going to go through them piece by piece. We're going to short selling later. But I want to talk about the accusations at the centre of this first stop, the Adani Group. They have seven publicly listed companies under their banner and they have been accused by Hindenburg research of committing the biggest con in corporate history. 

Speaker 4: [00:01:52] Hindenburg accused Adani Group and its billionaire founder and chairman of a brazen, a stock manipulation and accounting fraud scheme run over decades, partly through the use of shell companies. 

Sascha: [00:02:03] At Big Words. I'm dubious even without knowing the details, because like any time you say that something is the biggest, then you're immediately comparing them to other things. So let's dig into what exactly they're saying that they've done. 

Darcy: [00:02:17] It's a massive call, isn't it? Sacha But Hindenburg does have a bit of evidence, I guess, to back up their calls. They released a 100 page report accusing the Adani Group of illegally using offshore tax havens, and they also raised concerns about Adani's high levels of debt. Hindenburg is renowned for releasing reports on the allegedly impacts important fraudulent practices of other companies. And this report was released last week in a long Twitter thread which anyone can go and read 100 pages. 

Sascha: [00:02:46] That sounds like it's going to be a long Twitter thread. 

Darcy: [00:02:49] I did scroll through the whole Twitter thread, Sacha, but I can't lie and say that I read the whole thing.

Sascha: [00:02:55] The whole thing word for word. Look, strong words. Yeah. 

Darcy: [00:02:58] And Adani is a massive company to go after. As you mentioned, since the accusation went public, more than $90 billion in value has been wiped from the Adani Group stocks, and the group has been growing at a massive rate over the past few years. The New York Times reported that at the start of this year, Adani Enterprises had risen 3,000% over five years. 

Sascha: [00:03:18] 3000. That is a nice return. So essentially, as soon as this report was published, as soon as it went public, spooked investors all around the world, sold their positions in the company, and that in turn shrank the valuation by the 90 billion that you're talking about. 

Darcy: [00:03:36] That's right. So Adani Group's total market value before this report was about $200 billion. So it's almost been slashed in half. And its chairman, Gautam Adani, he was the third richest person in the world and now he's fallen out of the top ten again. It's important to note the Adani Group has challenged what Hindenburg has said. 

Audio Clip: [00:03:54] What was the rebuttal? What did we Hear? Yes, so the rebuttal was a follow on rebuttal, really. 

Darcy: [00:03:58] The Guardian said Adani has strongly denied the claims and described them as a malicious combination of selective misinformation and stale, baseless and discredited allegations. Adani said that Hindenburg is attempting to hurt their reputation and actually called it an attack on India. 

Sascha: [00:04:15] And they've also pointed out that hindenburg's profiting from the chaos they've created. 

Darcy: [00:04:20] They certainly are. And Hindenburg acknowledged that. They said, yes, we're profiting, but we aren't making these allegations up. They've cited two years of research. They included talks with former Adani senior executives and they reviewed thousands of documents in the book, said they would actually welcome any court case that was brought forward by Adani against them so that I could say all the evidence. 

Sascha: [00:04:41] I do have some more questions, Dar, about what was exactly said. The biggest con in corporate history. It's strong, but it's also vague. What exactly are the allegations? 

Audio Clip: [00:04:53] It also said that Adani Group has been investigated for misusing taxpayer funds for corruption, for money laundering. And then separately, Hindenburg also flagged some financial concerns. 

Darcy: [00:05:03] Hindenburg has claimed that there's an alleged Verizon stock manipulation and accounting fraud scheme that has driven up the price of the listed Sydney companies and inflated the personal net worth of their billionaire chairman, Tom Adani. And what we mean by inflated the price of the companies. It's done by using shell companies, offshore companies to manipulate the price of the listed ones by holding large positions in the company. These shells were used to launder money on the listed company balance sheets, and it helps maintain the appearance of financial health and solvency. Hindenburg said the listed Adani companies have a lot of debt, which puts the entire group on a pretty precarious financial footing. 

Audio Clip: [00:05:41] The drop in the group's stocks represents a decline of nearly $28 billion in the fortune of founder Gautam Adani, the richest person in Asia. 

Sascha: [00:05:51] Exactly Why would a company want to publish a document that targeted another and accused them of doing the wrong thing? Can two things be true? Adani is allegedly doing bad things, but Hindenburg is also benefiting in some way from publishing this information and making it public. 

Darcy: [00:06:09] That's a really good question, Sacha. Let's start with short selling. 

Sascha: [00:06:13] Which is basically how they're making a profit off this. 

Darcy: [00:06:16] That's right. So instead of betting on the price of an asset to go up like you and I do as investors, Sascha Short Sellers bet on the price to go down, and it's done by borrowing stock in a company whose price you think is going to fall. So you lend out the shares that you've borrowed, and then if the price eventually falls, you buy the shares back at the new lower price and repay the borrowed shares and pocket the difference. 

Sascha: [00:06:41] Can we put numbers to it so it makes a little bit more sense? 

Darcy: [00:06:44] Absolutely. Let's say a stock is trading at $100. You borrow 100 shares and you sell them for $10,000. If the price halved, so the stock goes to $50, you purchase back your 100 shares for the price of $5,000. So they've half that. Then you pocket the difference of $5,000. So you've made $5,000 profit. 

Sascha: [00:07:05] It sounds super straightforward and like something I'd love to try, but I can understand. Like most things simple in theory, much riskier in practice. 

Darcy: [00:07:14] Yeah, it definitely is. And this is where activists short sale is coming. 

Audio Clip: [00:07:17] Big news in activist land this morning. Investor Bill Ackman saying he's no longer going to take part in vocal activist short selling campaigns and.

Darcy: [00:07:25] They take a short position in a tradable company they believe is overvalued and then they make some noise in the public. They try and create a stir about the company that outlines their position in the hope that other investors will agree with them and sell the stock driving down the price. 

Sascha: [00:07:41] So in the hope that I as an investor, if I had shares in Adani, would read this report that Hindenburg released and think, hey, they're onto something here, I should get rid of these shares.

Darcy: [00:07:53] Exactly right. Hindenburg is open about the fact that they will make money off this. They agreed. They stand to realise massive gains if the prices of the Adani companies fail, that this is what short sellers do. 

Sascha: [00:08:03] And there's one more element to this tale, though, which adds an extra bit of drama. Makes it sound like something right out of succession. 

Audio Clip: [00:08:11] But considering the volatility of the market senior study, our board strongly valued that it would not have been morally correct to proceed with that field. 

Sascha: [00:08:22] And that's that the report was released right on the eve of a massive fundraising campaign by Adani that was basically designed to raise the money to pay off debt and finance expenditure. So it sounds like Hindenburg, like really went in with that timing. 

Darcy: [00:08:38] It's extremely dramatic timing. We're definitely going to say a doco about this. So there's a lot of speculation around at the moment. But what we do know is that the Adani Group had just closed what was described as a nail biting fundraising round and they raised two and a half billion dollars from a bunch of different shareholders around the world. It was like a capital raising. They were injecting shares into the company to raise money. 

Sascha: [00:09:02] I've had that before. When a company that I'm a shareholder of, they have issued me the option or the opportunity to buy new shares at a discounted price to what is trading. 

Darcy: [00:09:12] But in this case the report went public and the Adani share price absolutely tanked. So the people who had agreed to get involved in this share purchase plan were already going to be sitting on massive losses. And now the Adani Group has come out and said they're cancelling the program. 

Sascha: [00:09:27] Yeah, basically because they had agreed to buy these shares at a higher price than what they could now get on the market. So as you said, Darcy, the last word is that Adani has decided to shelve this plan. They said that they don't think it would be morally correct under the circumstances. So, Darcy, we've pulled apart all the drama, all the contacts who got our heads around the Adani situation. I want to look a little bit more about short selling. I can understand why it might be controversial. In some instances you could be using this power for good, but you could also target companies that are just trying to do the. Rising. So let's talk about that right after this break. Welcome back to The Dive. I'm your host, Sascha Kelly. I'm here with my colleague, Darcy Cordell. If you're enjoying our conversation, then the best thing you can do for us, Open your podcast player, Give us a five star review, write a comment, Tell us how great you think we are. We love reading them, but more importantly, it helps other people find the show. Today we're talking about the news of the week, which is the short report into Adani which triggered a massive collapse in the value of their business. And we've spent some time unpacking that and kind of crucially, the story is still ongoing. We don't really know where the chips are going to fall yet, so we'll keep an eye on that over the coming weeks. But Darcy, let's turn now to short selling and talk about some of the big stories of the past, because this sounds like a prime investing drama. 

Darcy: [00:10:56] It sure is. Sascha, have you watched The Big Short? 

Audio Clip: [00:10:58] Wall Street loves to use confusing terms to make you think only they can do what they do. 

Sascha: [00:11:02] I love the Big Short. It's one of my favourite movies. 

Audio Clip: [00:11:06] Here's Margot Robbie in a bubble bath to explain. 

Darcy: [00:11:09] There you go. Well, that is one of the most famous activist or short selling stories, Michael Burry. And he made his name by profiting from the mortgage crisis in the US between 2007 and 2000. Tax. 

Audio Clip: [00:11:20] Listen, I've been reviewing your position. I want to discuss your marks, make sure they're fair. Yeah, I think. I think you mean that you've secured a net short position yourself, so you're free to mark my swaps accurately for once, because it's now in your interest to do so. 

Darcy: [00:11:34] Basically, he predicted that the market would collapse and he found a way to short the market. As we spoke about before, he made $100 million profit on his own and about $700 million for his hedge fund at Scion Capital. 

Sascha: [00:11:48] That's an extraordinary amount of money, Darcy. 

Darcy: [00:11:50] That probably the most well known short seller in history or activist investor is George Soros. 

Audio Clip: [00:11:56] George Soros Public, and George Soros the greatest speculator. George Soros amassed around $1,000,000,000 speculator, classic. Anti-communist dissident. The man who broke the bank of England. 

Darcy: [00:12:06] And he is known for breaking the Bank of England. 

Audio Clip: [00:12:09] He's pretty unpopular in certain corners of Twitter where he's at the centre of just about every conspiracy theory. 

Darcy: [00:12:14] In the early nineties, Britain upped its interest rates to try and attract people around the world to buy the British pound. And Soros saw an opportunity here and he started short selling the currency. If you thought Michael Burry made a lot of money, Sacha Soros earned $1,000,000,000 for his short position and that's back in the nineties. 

Sascha: [00:12:32] Wow. That's just these are extraordinary numbers. So there are some examples of successful short selling. But as we said earlier, great in theory, riskier in practice. It can go very, very wrong, too. 

Darcy: [00:12:47] There's actually a lot more risk involved with short selling compared to conventional investing. Sascha, If I invest $1,000 in a stock, the amount of money that I can lose is $1,000 if I'm betting on it to go up. But with short selling, the potential losses are actually closer to unlimited. 

Sascha: [00:13:03] I know what you're saying, basically, because if it doesn't go down like you planned and it goes up, what happens? 

Darcy: [00:13:10] Well, remember, when you borrow a stock to short it, you have to eventually buy that stock back. But if it keeps going up, you can just lose massive multiples more of what you originally invested. A short squeeze is a situation where a heavily shorted stock suddenly experiences a significant increase in price, and that causes the short sellers to rush to buy the stock back in order to cover their positions and avoid further losses from happening. But then when they've gone to cover their positions, the buying pressure can actually further drive up the price of the asset and it leads to what we call a short squeeze.

Sascha: [00:13:44] So in your example earlier where you said I was buying, I had 100 shares that were worth $100 each. If instead of having it went up to 120, I now have to find $2,000 extra from my initial investment to cover in quotation marks my losses, and I won't have that handy. 

Darcy: [00:14:02] Yeah, exactly right, Sascha, $2,000 for 20%. But if it's 100%, it was $10,000. And it can keep going above that excess of 2021, though, was the year of short squeezes when shares of GameStop, which was a struggling video game retailer, suddenly soared in value following a group effort by retail investors on the Reddit forum. Wallstreetbets drive up the price of the stock.

Audio Clip: [00:14:26] These protesters are sounding off on social media sites, calling for stock tips that will make the group rich while hurting hedge funds. On the other side of the trade. 

Darcy: [00:14:36] The short squeeze was fuelled by a big number of short positions held on GameStop, which had been taken out by hedge funds, betting that the stock would go down in value and the short squeeze worked. The retail investors one. 

Sascha: [00:14:50] I remember that being really dramatic and controversial at the time. So Darcy interestingly, a lot of this information is public. What are some of the most shorted stocks at the moment? 

Darcy: [00:14:59] It's actually not uncommon for some of the most popular and well-known stocks in the world to have a lot of people shorting them. For example, Apple. Tesla, Amazon. These are all stocks that we know really well, but they've had massive amounts of short sellers predicting that they'll go down, especially in the past ten years or so. And a lot of those people have been burnt. But right now at the moment, some of the most shorted stocks in America, a pub matic, which has over 50% of its float shorted. There's also Nikola Corp., which is an electric vehicle maker. They have about 36% of their shares shorted and another company is Blink charging, which has about 38% of its share float shorted. 

Sascha: [00:15:41] So Darcy, any closing thoughts after doing all this research on short sellers and activist investors? Anything that's kind of come to the fore for you? 

Darcy: [00:15:50] Look, I'm not a massive fan of short selling, but I think that there is a place for as long as the short reports are well researched and they have the right intention, i.e. they're not just trying to make a quick buck, then I think it's really important to keep companies accountable. 

Sascha: [00:16:03] Right Darcy, big one that we unpacked today on this Friday I think was on our weekend. I'm really interested to see where this story with Adani goes. Thank you for joining us today. If you want to keep the conversation going, then why not follow us on Instagram? We're @thedivebusinessnews. You can contact us by email thedive@equitymates.com Or you can hit, follow and subscribe wherever you're listening right now, and then you'll never miss an episode. Darcy, thanks so much for joining me today. 

Darcy: [00:16:31] Thanks, Sascha.

Sascha: [00:16:32] Until next time.