India’s largest lender State Bank of India (SBI) said on Friday that its exposure to the Adani Group was well below the Reserve Bank of India’s (RBIs) Large Exposure Framework and was secured by cash generating assets.

The statement comes at a critical juncture with markets tanking on the basis of a short selling report from Hindenburg Research with the Adani Group caught in a maelstrom losing Rs 4.18 trillion in market cap in two trading sessions. The report by US-based investment research firm Hindenburg Research alleged that the group was engaged in “a brazen stock manipulation and accounting fraud scheme”.

The conglomerate has called the report “maliciously mischievous, unresearched”. It has said that it is “evaluating the relevant provisions under US and Indian laws for remedial and punitive action against Hindenburg Research”.

Indian banks have an exposure of around Rs 80,000 crore to the Adani Group, which is 38 per cent of the group’s total debt.

“While as a matter of policy, we don’t comment on individual clients, in the interest of setting the context right, we wish to clarify that SBI’s exposure to Adani Group is well below the Large Exposure Framework. All exposure to the group from SBI is secured by cash generating assets with adequate TRA/Escrow mechanism in place, hence debt service will not be a challenge,” said Swaminathan J., MD of corporate banking and subsidiaries at SBI, in a statement.

The SBI, however, did not comment on the amount of its exposure to the group.

With Indian equity markets roiled by a research report emerging from the US, everyone is curious as to what short selling actually means?

A 32,000-word report by American short-seller Hindenburg Research has left a Rs 4 lakh crore gash on the portfolios of bulge bracket Adani bulls which have been enjoying the gravity defying valuations since the Adani Wilmar public issue more or less a year ago. Every word shaving off Rs 12.5 crore from the valuation.

So, what is short selling?

Simply put, someone takes position by selling stock or other securities or commodities which one does not own at the time, in the hope of buying at a lower price before the delivery time.

Investopedia describes it in the following manner – selling is an investment or trading strategy that speculates on the decline in a share or other security’s price. It is an advanced strategy that should only be undertaken by experienced traders and investors.

Traders may use short selling as speculation and investors or portfolio managers may use it as a hedge against the downside risk of a long position in the same security or a related one. Speculation carries the possibility of substantial risk and is an advanced trading method. Hedging is a more common transaction involving placing an offsetting position to reduce risk exposure.

In short selling, a position is opened by borrowing shares of a stock or other assets that the investor believes will decrease in value. The investor then sells these borrowed shares to buyers willing to pay the market price. Before the borrowed shares must be returned, the trader is betting that the price will continue to decline and they can purchase the shares at a lower cost. The risk of loss on a short sale is theoretically unlimited since the price of any asset can climb to infinity.

Taking a contrarian position, top of the line broking and research firm CLSA said it doesn’t see a major downside risk to Indian banks from Adani group’s debt, in which the overall exposure for domestic public and private sector lenders remains well within the mangeable limits with adequate ring fencing.

InGovern Research Services issued a note on Friday – On Short Selling and Shareholder Activism – providing a perspective on the whole issue:

Hindenburg, as a short seller, should be considered as just another market participant which has a motivated view to release a negative report with aim to bring down the stock price.

1. Short selling is not new in Indian markets.

2. Short selling is a market mechanism and NOT wrong.

3. Short selling is healthy for Indian capital markets.

4. Short selling is a view on a stock price, it may NOT work.

5. Shareholder activism should be welcomed in Indian markets.

6. Indian companies should learn to take such reports in their stride.

7. There is a need for more investor activism in India.

8. As Indian market matures, it should get used to these kinds of activist investors taking interest in domestic companies.

9. However, short selling is not shareholder activism.

10. Short sellers are opportunist and very short-term focused. Such activism could be disruptive for management and companies.

11. Short sellers are not held in high regard in global capital markets and even in the US, many short sellers, including Hindenburg, are under investigation by the SEC and DoJ, as the short sellers are thought to achieve their objectives at all costs and detrimental to the interests of other investors.

12. Positive shareholder activism, like ValueAct Capital does, is when investors engage positively with the management and work towards bringing about change.

On Data in Hindenburg Report

There are no new facts in the Hindenburg report, and, at best, it is a compilation of all past allegations levelled against the Adani group.

1. Hindenburg has 3 types of data

a) Easily verifiable data on Marcap, P/E multiples, debt, shareholding patterns etc. available to all investors.

b) Data points that cannot be easily verified: Mauritius entities, etc.

c) Aspersions based on past (some over 20+ years), some of which were fully disclosed as part of various offering documents by the Adani group.

2. Some of the allegations in the Hindenburg report have been the subject of regulatory scrutiny in the past.

3. There are no specific complaints made to SEBI for investigation by Hindenburg. SEBI, the Indian securities market regulator, or the MCA, largely acts on specific complaints of fraud or market manipulation.

Timing of Release of Hindenburg Report

The strategically-timed release of the Hindenburg report on the eve of the follow-on public offering (FPO) by Adani Enterprises Ltd seems to indicate that there was some objective to scare investors.

1. However, the Hindenburg report itself may not impact the FPO share sale.

2. The anchor book has already been oversubscribed on January 25, 2023, given that the objective of many of the long-term investors would be to hold the stock for many years.

3. There could be some sentimental hit among retail investors when the FPO opens on January 27

On Valuations and Leverage

Though the Hindenburg report talks of high valuations and over leverage by the Adani group, the nature of the industries in which Adani group companies operate and data on debt holding in Adani group companies indicate otherwise.

1. Valuations is in the eyes of those who have a position and are willing to bet on it.

2. These days, there are many new age companies with no revenue model and with no earnings, Adani stocks may appear to be inexpensive.