What is short-selling? How Hindenburg used it last year to make $4 million from revelations on Adani Group?

Short selling is a trading strategy in the stock markets. In short selling, traders speculate over a stock and expect its price to fall. Short-selling traders are commonly known as short sellers. They place their bets on a company's stock, which they anticipate will fall at a specific time.

The short sellers profit from the company's stock price drop. The traders leverage the securities from their brokers to sell them first, and according to their expectations, when the price of the security drops in the open market, they buy it back for a lower price to settle and close the trade.

It's a classic high risk-to-high reward ratio, where the trader bears the unlimited risk in case the price of the selected stock goes up instead of falling --this creates a situation of debt as the trader has to purchase those shares at a higher price to pay back the leverage.

Short-selling trades can be made for market speculation and hedging to square off traders' long positions.

Every trader entering into a short-selling trade with their broker has to pay interest on the total value of the shares they borrowed for the duration of the trade. In India, all categories of investors, including retail and institutional investors, are allowed to short-sell, according to a Securities and Exchange Board of India (SEBI) framework issued on January 5, 2024.

Short-selling is recognised globally as a trade strategy in markets with active equity derivatives trading.

How much did Hindenburg make?

Nathan Anderson's Hindenburg short-sell trade position based on charges about the Adani Group of companies resulted in a nearly $153 billion wipe-off of the companies' market value. Hindenburg made just over $4 million from it. Bloomberg reported that the earnings figure was from the statement disclosed by Hindenburg. Mint could not verify the figures independently.

SEBI's show cause notice to Hindenburg highlighted the presence of Kingdon Capital Management, which had access to the original Hindenburg report on Adani, two months before it was published and reached the public domain. Kingdon agreed to pay Hindenburg 30 per cent of the profits from the Adani trades, according to the SEBI notice.

Kingdon has shared $4.1 million of the profits from the Adani short-selling trade to Hindenburg, and another $1.4 million is yet to be shared, according to the capital markets regulator.

Hindenburg's recent update on the Adani-Hindenburg saga includes allegations that the SEBI Chairperson, Madhabi Puri Buch, was involved in holding stakes in the offshore entities linked to the alleged money laundering case. The short seller released an update on the original report, on August 10. The original Adani Hindenburg report was released on January 24, 2023.

SEBI has responded to the short-seller's claims, calling them “inappropriate” and citing that the Chairperson had made the required disclosures from time to time. “Chairperson has also recused herself in matters involving potential conflicts of interest,” SEBI said in a statement released on August 11.