Gautam Adani, the third richest man in the world about a week ago has slipped to 17th position thanks to a so called ‘research paper’ published on the site called hindenburgresearch.com. Generally the is no big deal and such paper do gain a traction in sometime but in this case the very next date stock of Adani began to fall. In other words, there was an accumulation of stock and concerted action around the globe to make it happen. I will explain this later. Now the problem is that who did the research is not known. The paper is written in an English which may be called ‘Indian’ English. The diction seems to be from West Bengal and lo and behold, it quotes a former investment banker who is now a member of Parliament. Her name is Mohua Mitra. Here is she raising voice in Parliament without giving prior notice:

This is her picture:

According to following youtuber, she and other ex-employees of Morgan were involved in the conspiracy to short sell the shares of Adani Group.

But all this doesn’t matter. The reason is that just a few employees of a financial firm can not do it without substantial capital and membership of stock exchanges. Above all it requires huge amount of money to pull this off.

The operation:

The Hindenburg report wants people to believe that it triggered the fall. That is a smoke screen. This publication intends to justify The Operation to short sell Adani shares. It involves three transactions and months planning. First part is to buy large number of shares of Adani. So long there are no sellers there is no fall in prices. Now selling shares continuously will entail losses. Huge losses. The second transaction involves short sale of future which would become profitable but would only set off the losses from sale of shares. Now to make it profitable, either calls are written which are expensive as it requires huge margins or the puts at ‘out of money strike price’ are bought and encashed.

Again this billions of dollar operation can not be operationalised by few individuals. Institutions have to be involved.

A disclaimer:

I had always felt that Adani shares are overpriced as investor are over-enthusiastic. Therefore I had no holding in Adani group shares. In fact I sold the Cement Shares of the company after it was acquired by Adani, with a little profit. But after this fiasco, I am buying Adani on lower circuit and averaging it gradually. Thus I have a financial reason to be optimistic. It is a conflict of interest. But how did I reach this conclusion?

Is Adani a Con Man?

In this complex world of finance, there is a con man on every corner. But let me explain that ability to sell shares at an overprice is no con trick. It is perfectly legal. Look at the shares of Zomato an PayTM at the time of IPO and now. Manipulation of price can not be proved unless an exact detail of transactions is given to regulator and it is accepted. When investing, I look at three things

1. The Business Model: Tech companies have worst business model. Technology becomes obsolete overnight. That is not good for long term investing. But ports, cement steel and sugar etc. are always there. We can not survive without it. We are surviving without Orkut and may survive without FaceBook in future.
2. 2. Dividend Payout or Valuation: This I about payout method. Some share pay by bonus or rights shares or others pay by dividend. I prefer dividend but may go for overpriced shares if there is a track record of bonus etc. Adani had none earlier but now we can expect an issue of rights, once dust settles down.
3. Assets: What assets does Twitter has? A building? Except the algorithm, it has no tangible asset at all. I will not invest in such company by long pole. More so when it does not have operational profits. Adani group has huge tangible assets. The Ports, factories on huge lands, leases etc. There I a saying that dead elephant is sold at quarter million more than the alive elephant which is sold for a bare million. The reason is that dead elephant’s bones are sold for more. Similar is the case of a company. Tangible assets can be sold.

Now the allegations against Adani are generic in nature. Th allegations are made for the sake of allegations. There is no demonstration of any loss to any company or any overpricing of assets. Some allegations are so ludicrous that they make remaining allegations as non serious. It says that an auditor certifying the audit report is too young being below the age 29 years.

Doe anonymous author of the report knows that according to the Census 2011, over 58.3 per cent of the India’s population is aged 29 years or below. If you throw a stone randomly on a cloud it is almost impossible to hit any body above aged 50 because they avoid crowds.

Solution:

The guilty party is SEBI. This so called report is a smoke screen to justify the manipulated bear hammering. They can do it because a small investor is prohibited to do it. The three scrip formula given above require about one million rupee per lot to operationalise it. One could initiate it in one third cost but price fluctuation would require more money to be pumped into it.

SEBI has made different lot sizes for derivatives and cash segments which has no basis. It reasons that it will prevent speculation. Why have a derivative market at all? Lot size to purchase share is one. But for future and derivatives it is pegged at about bundle size equivalent to 2 lacs (200,000) rupees. If the lot size is brought at par, small investor will stop selling short as it can write call without margin and keep covering losses on the share holding. The premium on calls will cover the loss and there would be no panic selling. After all majority of holding is in the hands of retail investors and institutions which are not part of bear cartel.

Hope SEBI wakes up and free the derivative market for retail investors. Just one move can stop panic in small investors.

As regards the allegations against Adani, here is a YouTube video explaining it and the reply of Adani. BTW this youtuber is also quite young.