The term short- selling has come into the spotlight after Hindenburg Research published its forensic report against Adani Group of companies on Wednesday. Ashley Coutinho takes a deeper look at what the term means.
What is short-selling
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He will buy the same stock back at Rs 400 levels, making about Rs 100. Naked shorts, which involve selling a stock without borrowing first, are not permitted in India.
How do short-sellers differ from those going long
Short-sellers bet on and profit from a drop in a security’s price. Long investors bet on a surge in the stock’s price and benefit when the price moves up. Short-selling has a high risk-reward ratio. Losses can mount quickly, and exponentially, due to margin calls.
What are the ways to short an asset
The most common way is physical short-selling, which involves borrowing assets such as shares or bonds and selling them. Short positions can also be achieved through futures or options, where the investor can assume an obligation or right to sell an asset at a future date at a price that is fixed at the time the contract is created. A short position can also be achieved through certain types of swap, such as contracts for differences. These are agreements between two parties to pay each other the difference if the price of an asset rises or falls, under which the party that will benefit if the price falls will have a short position.
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Who is Hindenburg Research
Hindenburg Research is a US-based forensic research firm with a focus on activist short-selling founded by Nathan Anderson. The firm generates public reports on corporate fraud and has covered companies such as Nikola, Clover Health, Kandi, Lordstown Motors, and Tecnoglass. Besides fundamental analysis, the firm looks for situations where companies may have accounting irregularities, management issues, undisclosed related-party transactions, and dubious financial reporting practices. In September 2020, it released a report on Nikola with the aid of whistleblowers and former employees, called out a vast array of alleged lies and deceptions by Nikola in the years leading up to its proposed partnership with General Motors.
Short-selling and shareholder activism A report by proxy advisory firm InGovern says that short-selling is not new to Indian markets, and is, in fact, healthy. Shareholder activism should be welcomed in Indian markets and Indian companies should learn to such take such reports in their stride. However, it clarified that short-selling is not shareholder activism. “Short-sellers are opportunist and very short-term focused. Such activism could be disruptive for management and companies. Short-sellers are not held in high regard in global capital markets and even in the US, many short-sellers, including Hindenburg, are under investigations by the SEC (US Securities and Exchange Commission ) and DoJ (US department of justice), as the short-sellers are thought to achieve their objectives at all costs and detrimental to the interests of other investors,” the firm said in a note.
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