Every Tuesday afternoon we publish a collection of topics and give our expert opinion about the Equity Markets.

The latest and most ambitious short report yet from Hindenburg Research takes aim at Indian multinational conglomerate, Adani Group, and the results have seen billions of dollars wiped from its market capitalisation. ABSI this week takes a look at the Adani short selling saga and analyses the debate on whether activist short selling is protecting investors or market manipulation.

Founded in 1988, Adani Group has quickly grown to become one of India’s largest business groups and making its founder, Gautam Adani, India’s richest man. It has interests in ports, agribusiness, defence, energy, real estate and other industries, reporting US$23.3 billion in revenue in 2022. However, this proverbial Goliath has met its match in the ‘David-like’ short seller Hindenburg Research.

Hindenburg Research is an investment research firm that focuses on short selling and forensic research, with a focus on exposing fraudulent activities by publicly traded companies. They are known for publishing highly critical research reports on companies that they believe have engaged in financial fraud or have misrepresented their financials. Last week, Hindenburg identified their latest target to be Adani publishing a 132-page dossier titled “Adani Group: How The World’s 3rd Richest Man Is Pulling The Largest Con In Corporate History”.

The fallout from the Hindenburg report has been disastrous for the Adani share price which has lost ~US$66 billion in value over the past week. It has also forced Adani to refute the claims in a 413-page document that Hindenburg claims is “a boated response that ignores every key allegation we raised.”

Source: Google Finance

The whole saga resurfaces old arguments about the role of short-selling in the market, especially activist short-sellers, like Hindenburg, which take short positions and then proceed to tell the market why in highly publicised documents. Detractors of this type of practice call it market manipulation, citing the massive conflicts of interest and the financial incentive behind the attacks on the companies. This is inflated by the fact that short sellers could potentially “short & distort”, profiting from the initial reaction to a report before any inaccuracies are identified; in a similar vein to a “pump & dump” scheme. 

Source: Reddit

In contrast, proponents insist that short selling is ethical and act as a check on upward market manipulation by facilitating price discovery. Furthermore, provided that the information contained in a short report is factually accurate, the practice is completely legal and has a historical track record of exposing fraud. Hindenburg is the most notorious activist short seller in the market thanks to their firm-making short on Nikola Corp in Sept 2020, exposing the infamous truck demonstration down a hill video. This eventually led to the fraud conviction of Nikola founder Trevor Milton in 2021.

Source: Google Finance

Track record is everything and when you have a firm with a strong history of exposing fraud in the marketplace then rightfully you deserve the market clout that follows the publishing of a short report. Anonymous short sellers posting in stock forums give the practice a bad name, but the reputable firms, such as Hindenburg Research, who stand behind their work and risk legal ramifications for inaccuracies in the pursuit of exposing unethical actors in the market should be applauded and rewarded. That isn’t to say Hindenburg is correct in their allegations against Adani Group, but they have spent two years on their due diligence for this short report and I wouldn’t want to be holding the stock while this plays out. 

We offer value-rich content to our BPC community of subscribers. If you're interested in the stock market, you will enjoy our exclusive mailing lists focused on all aspects of the market.

To receive our exclusive E-Newsletter, subscribe to 'As Barclay Sees It' now.