Adani-Hindenburg row: What is short selling and why is it in news?

The downward revision in the outlook on the ratings of the two companies comes after the entire Adani group was plunged into a crisis following a report by US-based Hindenburg Research, which alleged gaps in the group's financials, high debt burden, and overvaluation

The contentious issue of short selling has been in the news since Hindenburg Research published a report last week on Adani Group and its alleged accounting fraud. Since the release of the Hindenburg report on January 24, the Adani Group has erased around $117 billion market cap, one of the worst in history.

The Hindenburg report accused Adani Group of “brazen stock manipulation and accounting fraud” – charges that the group denies. Nevertheless, stocks of the group’s many companies have crashed since the report was released and affected the personal net worth of group founder Gautam Adani, who is no longer the richest man in Asia as per the Forbes real-time billionaires list.

What complicates the Adani-Hindenburg issue is the fact that Hindenburg Research is not merely a research firm. It’s an “activist short seller” that stands to gain financially from the fall in Adani’s stock price.

What is short selling and how does it benefit Hindenburg Research?

Short selling is a trading strategy where an investor borrows shares of a stock they expect to fall in price, sells the shares, and then buys them back at a lower price to make a profit.

Short selling, or shorting, is essentially betting that a company’s stock will fall. It is considered a high risk investment strategy.

Unlike traditional trading in which the investor buys stock and hopes that its price will appreciate, short sellers make a profit when stock falls.

To short stock, traders borrow shares from a broker for an agreed period of time. Then they sell the stock and make money. When it is time to return the borrowed shares, the trader will buy shares on the market and repay them to the broker.

If the price of the shares is down, the traders make a profit.

Hindenburg engages in activist short selling, which involves selling borrowed stocks with the hope of buying the same at a lower price later. If the prices fall on the expected lines, the short sellers make a killing.

The investment research firm, which invests its own capital, takes such bets based on its research, which looks for "man-made disasters" such as accounting irregularities, mismanagement and undisclosed related-party transactions.