Hinderburg research report alleging Adani group of stocks manipulation and multiple financial fraud has caused the conglomerate to lose $120 billion as all its stocks have fell, wiping out more than half of their combined value. But what has the US based investment research firm gained from it?
Hindeburg research in its 100-page report released on 24th January announced that it had taken a short position in Gautam Adani’s companies through US-traded bonds and non-Indian-traded derivatives. So, the firm is a “short seller”, attempting to profit from an investment strategy known in the financial sector as ‘short selling’ or simply ‘shorting’.
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What is short selling or shorting?
Short selling is one of many investment strategies in which an investor bets on a stock or assets in the expectation that its price will fall in the future. The investor then borrows (rather than purchasing) shares of stock/ asset from lender and sells them in the market. If the price falls, the investor can repurchase it at the lower price, return them to the original lender, and pocket the difference as profit. And if the price does not fall as expected, the investor’s strategy becomes counterproductive and must bear the cost, making the technique extremely complex, research-intensive, and risky.
This type of selling is referred to as “short” because the trader is selling the security in the hopes of profiting from a price decrease, as opposed to a standard long position, in which the trader purchases the security in the hope that its price will rise.
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The strategy can be understood using the following hypothetical case. Consider the case of an investor who believes that the stock of company XYZ is overvalued and will fall in value. The investor borrows 100 shares of XYZ stock from a broker and sells it in the market for ₹100 per share. The following day, the price of XYZ falls to ₹90 per share. The investor buybacks 100 shares from the market and returns them to the original lender. In this process, he gets profit of ₹1,000 ( ₹100 x 100 – ₹90 x 100).
In summary, short selling is a trading strategy that allows traders to profit against the market by gaining while the stock’s or assets’ price falls. It differs from normal trading also as the investor sell first and buy later.
It does, however, entail significant risk because the potential loss is limitless.
Is short selling legal in India?
Securities and Exchange Board of India (SEBI), the regulatory body for securities and commodity market in India, defines short selling as selling a stock which the seller does not own at the time of trade.
According to a circular dated on December 2007, all retail and institutional investors are permitted to short sell. However with heavy regulatory norms.
1.Securities traded in the Futures and Options (F&O) segment are eligible for short selling, with SEBI periodically reviewing the list of stocks that are eligible for short selling transactions.
2. Naked short selling -not owned but also not borrowed – would be prohibited, and all investors would be required to deliver the securities at the time of settlement.
3. Institutional investor have to square-off their transactions intra-day.
4. When placing an order, institutional investors must declare up front whether the transaction is a short sale. Retail investors, however, would be allowed to make a similar disclosure by the end of the trading day.