Short-selling Adani stocks are hard in India: Here’s why.

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Hindenburg Research’s decision to only short-selling Adani Group securities outside of India has highlighted the country’s limitations as well as the peculiarities of the business empire itself.

The Indian government has imposed a slew of restrictions on short selling, including requiring institutional investors to notify the stock exchange of planned trades before they executed and requiring retail counterparts to close positions every day. They also enforce the widely supported global ban on naked shorts, the practice of selling shares without first borrowing them.

Shorting the Adani Group also comes with particular difficulties. The Indian-listed entities all have a relatively low free float and few institutional investors, which means there is a scarcity of shares for short sellers to borrow, and they are therefore more expensive. Founders and controlling shareholders hold at least 60% in nine of the 10 stocks, data compiled by Bloomberg Intelligence show.

The fact that there was little short selling of Adani shares meant there was hardly any short covering that would normally limit a stock’s downside.

“The delicious irony is that shares of Adani companies are tanking hard or limited down partly because India makes it so hard to short in the first place,” short-selling specialist Scorpion Capital Partners said last week in a tweet. There was “no one to step in on the other side,” it said.

Hindenburg made clear in the disclosure of its report that its positions were all offshore. The shorts on the Adani Group’s companies held through U.S.-traded bonds and non-Indian traded derivatives, it said. The short seller declined to comment on its decision to use offshore instruments, when contacted by Bloomberg.

Theoretically, the potential gains are enormous. A trader who sold $1 million Adani Enterprises Ltd. shares at the open on Feb. 1 and bought them back. After the record 28% plunge would have made about $280,000, excluding fees and transaction costs according to Bloomberg calculations.

Shorting Adani Group shares is far more costly than betting against some of its Indian peers. 


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