What Is Short-Selling? How Hindenburg Research Makes Money From Financial Exposes? Explained

Short selling: It is used for market speculation and hedging to offset traders' long positions

One high-profile example of short selling involves Nathan Anderson's Hindenburg Research, which took a short-sell position against Adani Group.

Source : Hindenburg Research

Short selling is a well-known trading strategy in the stock market, where traders, known as short sellers, speculate on a stock's price falling. These traders place their bets on a company's stock, anticipating that its value will decrease at a specific time.

What is Short selling strategy? 

In this strategy, short sellers profit from the drop in a stock's price. They borrow securities from their brokers to sell them first, and when the price of the security drops as expected, they buy it back at a lower price to close the trade, thus securing a profit. However, the strategy comes with significant risks. If the stock price rises instead of falling, the trader faces potentially unlimited losses, as they must purchase the shares at a higher price to repay the borrowed amount.

How does it work?

Short selling is used for market speculation and hedging to offset traders' long positions. In India, all categories of investors, including retail and institutional, are permitted to short-sell under a framework issued by the Securities and Exchange Board of India (SEBI) on January 5, 2024. Traders involved in short selling must pay interest on the total value of the borrowed shares for the duration of the trade.

Globally, short selling is recognised as a legitimate trading strategy, particularly in markets with active equity derivatives trading.

What exactly is Hindenburg Research?

One high-profile example of short selling involves Nathan Anderson's Hindenburg Research, which took a short-sell position against Adani Group. This move, based on allegations against the Adani companies, led to a nearly $153 billion drop in the market value of Adani Group. Hindenburg reportedly earned over $4 million from this trade, according to a statement disclosed by the firm and reported by Bloomberg.

New exposé

In a new report released on Saturday, Hindenburg alleged that Madhabi Buch, the current Chairperson of the Securities and Exchange Board of India (SEBI), and her husband Dhaval Buch, held stakes in offshore funds connected to Adani Group's alleged money siphoning scandal.

Impact on Adani Group shares

On Monday, shares of several Adani Group entities plummeted as markets opened, reflecting a bearish sentiment following fresh allegations by US-based short seller, Hindenburg Research.

The report's impact was evident as stocks across the conglomerate took a hit. By 9:41 AM, shares of Adani Enterprises, the group's flagship entity, had dropped over 3 per cent, trading at Rs 3,079 on the BSE. Similarly, Adani Ports and Special Economic Zone Ltd saw its stock decline by 2.40 per cent to Rs 1,496.45 per share.

At 9:42 AM, Adani Power shares were down nearly 5 per cent, trading at Rs 661.95, while Adani Green saw a 3.78 per cent drop to Rs 1,712.85 per share on the BSE.

The SEBI issued a show-cause notice to Hindenburg, revealing that Kingdon Capital Management had access to the original Hindenburg report on Adani two months before it was made public. According to the SEBI notice, Kingdon agreed to pay Hindenburg 30 per cent of the profits from the Adani trades.

SEBI's response

The SEBI responded to Hindenburg's claims on August 11, calling them "inappropriate" and stating that the chairperson had made the required disclosures and recused herself from matters involving potential conflicts of interest.