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How Short seller causes $5.5 billion damage to Gautam Adani in Adani vs Hindenburg battle

A report by Hindenburg Research, a short-seller, grabbed headlines on Wednesday and sent shares of Adani group companies tumbling. A short seller is one who sells a stock without owning it at the time of trade.

A short seller sells a borrowed stock in hopes of making money by buying it back at a cheaper price later.

For example, if a short seller expects a Rs 100 stock to fall to Rs 60-70 levels, he will borrow it from a broker and sell it to investors willing to pay Rs 100 for the stock. He will buy the same stock back at Rs 60-70, if it falls, to cover his positions and earn Rs 30. Naked shorts, where a short-seller sells a stock without borrowing first, is not permitted in India and the US.

A short seller is someone who sells a stock that they do not own in the hopes of buying it back at a lower price later. However, this can be risky as short sellers often rely on confusion and panic in the market to make a profit. In this case, a short-seller named Hindenburg Research, which is a forensic short seller, has made allegations against the Adani group, including accusations of accounting fraud, stock manipulation, and money laundering. The research took two years to complete and claims that the Adani group's stocks are overvalued with a potential downside of 85%. The report also poses 88 questions to the Adani group. As a result of the report, the company's stock value dropped and the wealth of India's richest person, Gautam Adani, decreased by $5.5 billion in a single day.

Adani Group has stated that they are looking into taking legal action against Hindenburg Research, a short-seller, due to their report that caused a decline in the shares of Adani group companies. Hindenburg Research is a forensic short-seller that has made allegations of accounting fraud, stock manipulation, and money laundering against the Adani Group. They also stated that they have short positions in Adani Group companies through US-traded bonds and non-Indian-traded derivatives, and stand to gain if the price of the securities they covered decrease. However, they also stated that they may continue to buy or sell the securities regardless of their initial conclusions or opinions.

Hindenburg Research, the short-seller firm, has recently published a report that caused shares of Adani group companies to decrease significantly. In June 2019, the firm had made similar allegations against NYSE-listed Eros International, claiming that the company's auditor, Grant Thornton, did not properly examine the company's financials and that the stock would become worthless. According to a Bloomberg report, 30 companies that Hindenburg targeted since 2020 have on average lost around 15% in the following day and 26% six months later. It is important to note that Hindenburg has an agenda as a short-seller and some of the claims made in the report were already being discussed among investors. In the past, Hindenburg had made successful short positions. In September 2020, it took short positions in electric vehicle company Nikola and alleged that the company had engaged in lies and deception in the years leading up to its proposed partnership with General Motors. As a result, Nikola's Founder and Executive Chairman, Trevor Milton, resigned from the company. Hindenburg stated on its website that the story had been covered by several mainstream international media outlets, including the Wall Street Journal, Financial Times, CNN, Barron's and CNBC, and that investigations into the company had been launched by both the SEC and the DOJ.

Hindenburg Research released a report that alleged that Rajesh Adani, the brother of Gautam Adani, and Samir Vora, a brother-in-law of Gautam Adani, played key roles in a diamond trading import/export scheme that used offshore shell entities to generate artificial turnover. The report also claimed that Vinod Adani, another brother of Gautam Adani, who is reportedly at the center of government investigations, manages a network of offshore entities that have collectively moved billions of dollars into Adani's publicly listed and private entities. These companies, according to Hindenburg Research, engage in stock parking and manipulation, and money laundering through the private companies into the listed ones. Adani Group CFO Jugeshinder Singh strongly denied the allegations and questioned the timing of the report's publication, noting that Hindenburg Research had not made any attempt to contact the Adani Group before publishing the report. He also stated that the report is a malicious combination of selective misinformation and stale, baseless, and discredited allegations that have been tested and rejected by India's highest courts.

​​Jugeshinder Singh, Adani Group CFO, stated that the report had a malicious intention to tarnish the reputation of the Adani Group with the main goal of harming the upcoming follow-on public offering from Adani Enterprises, which is the largest FPO ever in India. He also mentioned that the investor community has always trusted the Adani Group, based on detailed analysis and reports prepared by financial experts and leading national and international credit rating agencies. He added that the Adani Group's informed and knowledgeable investors are not swayed by one-sided, motivated and unsubstantiated reports with vested interests. In 2022, Gautam Adani was the only billionaire among the top 10 wealthiest people to see an increase in his wealth. However, in 2023 so far, he is the only one among the top 10 to have lost wealth. His net worth is currently at $113 billion, a decrease of $7.1 billion year-to-date.

On Wednesday, the market value of ten Adani group stocks, including newly-acquired businesses such as ACC, Ambuja Cements, and NDTV, decreased by Rs 97,000 crore. Additionally, US dollar-denominated bonds issued by Adani Green Energy dropped nearly 15 cents to just under 80 cents on the dollar, as per Tradeweb data. Similarly, international bonds issued by Adani Ports And Special Economic Zone, Adani Transmission, and Adani Electricity Mumbai also saw declines, as reported by Reuters on Wednesday.

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