As a short-selling report rocks the markets, the State Bank of India defends its exposure to the Adani Group.
The largest lender in India, State Bank of India (SBI), stated on Friday that its exposure to the Adani Group was substantially below the Reserve Bank of India’s (RBI) Large Exposure Framework and that cash-generating assets protected it.
The announcement comes at a crucial time when markets crashed due to a short-selling report from Hindenburg Research, trapping the Adani Group in a storm that cost it Rs 4.18 trillion in market cap over two trading sessions.
According to the study by US-based financial research firm Hindenburg Research, a brazen stock manipulation and accounting fraud operation was being carried out by the group.
The conglomerate referred to the study as “maliciously naughty, unresearched.” It has stated that it is “considering the pertinent legal options under US and Indian legislation for corrective and punitive action against Hindenburg Research.” 38% of the Adani Group’s total debt is held by Indian banks, which have exposure to the company of about Rs 80,000 crore.
“We don’t comment on specific customers as a matter of policy, but in the spirit of getting the record straight, we would like to clarify that SBI’s exposure to Adani Group is significantly lower than the Large Exposure Framework.
Debt service won’t be complex because SBI’s exposure to the group is protected by cash-generating assets and an appropriate TRA/Escrow mechanism. “In a statement, Swaminathan J., MD of corporate banking and subsidiaries at SBI, stated. But the SBI remained silent over the extent of its contact with the group.
Everyone is wondering what short selling entails after a study report from the US roiled Indian equities markets.
The portfolios of bulge bracket Adani bulls, who have been enjoying the gravity-defying valuations since the Adani Wilmar public offering more or less a year ago, have been gashed by a 32,000-word research by American short-seller Hindenburg Research to the tune of Rs 4 lakh crore. Every syllable subtracts 12.5 crore rupees from the worth.
Then what exactly is short selling?
Taking a position involves selling stocks, other securities, or commodities one does not possess to purchase them at a lower price before delivery eventually.
According to Investopedia, selling is an investment or trading strategy that bets on the declining value of a share or other securities. Because of its complexity, only seasoned traders and investors should use this advanced technology.
Investors or portfolio managers may employ short selling to protect themselves from the adverse risk of a long position in the same or closely similar investment. At the same time, traders may use it for speculation.
Speculation is an advanced trading strategy that has the potential for significant risk. The more frequent transaction known as “hedging” takes an opposite position to lessen risk exposure.
When engaging in short selling, a position is established by obtaining shares of a stock or other asset the investor predicts will appreciate less. The investor then sells these borrowed shares to bidders willing to pay the going market rate.
The trader hopes the price will keep falling so they can buy the shares at a reduced price before the borrowed shares have to be returned. Since the cost of any item can increase indefinitely, there is potentially no limit to the potential loss on a short sale.
The top-tier broking and research firm CLSA took a contrarian stance, stating that it does not see significant downside risk to Indian banks from the debt of the Adani Group, as the total exposure for domestic public and private sector lenders remains well within manageable limits with adequate ring-fencing.
InGovern Research Services published a note on Friday titled “On Short Selling and Shareholder Activism” that analyses the overall situation: As a short seller, Hindenburg should be viewed as just another market participant who is driven to leak unfavourable news to drive down the company’s price.
Short sales are not a recent development in Indian marketplaces.
Shorting securities is a legal and legitimate market mechanism.
The Indian capital markets benefit from short selling.
Short selling is an opinion on a stock price; it could not be successful.
Shareholder action in Indian markets should be encouraged.
Indian businesses should learn to accept such reports with grace.
India needs to encourage more investor activism.
As the Indian market develops, it should get used to these activist investors showing an interest in local companies.
Short selling, however, is not shareholder activism.
Short sellers tend to be very short-term-oriented and opportunistic. Such action might be disruptive to leadership and businesses.
Short sellers are not given much credit in the world’s capital markets. Even in the US, the SEC and DOJ are looking into a number of them, including the short seller of the Hindenburg, as they are believed to be working against the interests of other investors to achieve their goals.
Positive shareholder activism refers to how investors interact favourably with management and try to effect change. ValueAct Capital is an example of this.
Regarding Information from the Hindenburg Report
The Hindenburg report does not contain any new information; at most, it is a compendium of all prior accusations against the Adani company. Among the three sorts of data available for Hindenburg are:
a) Accessible to all investors, easily verified data on Marcap, P/E multiples, debt, shareholding patterns, etc.
b) Facts that are difficult to verify: Mauritius entities, etc.
c) Criticism based on the past (some dating back more than 20 years), some of which the Adani group fully acknowledged in several offering documents.
The regulatory community has previously examined a few of the claims made in the Hindenburg report.
SEBI has not received any particular complaints that Hindenburg should consider. The MCA or SEBI, India’s securities market regulator, mostly takes action in response to specific fraud or market manipulation allegations.
Hindenburg Report’s Publication Date
It appears that there was some intention to terrify investors, given the Hindenburg report’s well-timed release on the eve of Adani Enterprises Ltd.’s follow-on public offering (FPO).
However, the Hindenburg report alone might not affect the sale of FPO shares. Given that many long-term investors would want to keep the shares for many years, the anchor book was already oversubscribed on January 25, 2023.
When the FPO starts on January 27, some sentimental fallout might occur among individual investors.
Considering Valuations and Leverage
The nature of the industries in which Adani group companies operate and data on debt holding in Adani group companies contradict the Hindenburg report’s claims that the Adani group has high valuations and excessive leverage.
Valuations are based on the opinions of those willing to stake a claim. Given that many modern businesses lack a business model and a source of income, Adani stock may seem to be a bargain.
