Bear Attack 2.0: Having Tasted Blood...How Adani Short-sellers Targeted Indian Markets Again In August
Data can reveal trends but the events around it... often reveal those hidden stories. This is the story of how foreign short-sellers are likely to have 'pre-planned a second notorious attack' on the Indian stock markets in August, modelled in the same fashion as the Hindenburg Research report in January.
On February 11, a report by Palak Shah first revealed how a Tsunami of short-selling bets preceded the publication of the Hindenburg report on January 25, which triggered the $100 billion rout in Adani Group companies. Then, it involved planning in a foreign land. The report led to investigations by market regulator Sebi and other agencies against the bear cartel. In March, the regulator told India's apex court that it was investigating short sellers around the Hindenburg report.
But this time again, short-selling positions were created in the Indian markets, mainly by foreign funds, ahead of the publication of a report by Organised Crime and Corruption Reporting Project (OCCRP) on August 31. The matching of the data and the event unravels a story. Read on...
Like Hindenburg, like OCCRP: Two sides of the same coin
Monthly expiry of equity derivatives on the last Thursday of each month, is a crucial event for the Indian markets. Greed and fear is running high on the days surrounding the derivative expiry since traders are in a rush trying to get 'in' or 'out' of their positions. It simply ensures that the volume churn is unusually higher by tens of billions of dollars during the expiry week.
It is an open secret in the wily world of stock market traders that any surprising and unanticipated news flow - negative or positive - amidst such frenzy can have a wide-ranging impact on the markets. There is little wonder among investigators and market experts that the sudden build-up of short positions by foreign funds in August like in January was without any knowledge of the impending event.
History will show that most major market crashes were on the back of negative news flows and rumours mongering around the derivative expiry week. Here, the timing of the two reports on the Adani group is a telltale sign.
Also Read: A Soft Target
Timing, the essence
Consider this: Hindenburg report targeting the Adani Group was outed late on the evening of January 24 and went viral in India's stock markets on January 25, the last Thursday of the month - derivative expiry. A nearly similar report by OCCRP was published in foreign newspapers and went viral on the morning of August 31, the last Thursday of the month - derivative expiry. Those with a thorough knowledge of the market dynamics will certainly know that the timing of the two reports cannot be a mere coincidence.
George Soros, a globally celebrated short seller of financial assets, had expressed happiness after the publication of Hindenburg report on Adani group and the subsequent market reaction to it. His logic was that the report and the market reaction would impact India's current political scenario and loosen Prime Minister Narendra Modi's hold (influence) on the country since it will tilt the public opinion against him. Again history is full of evidence how strong market reactions have widely impacted the general public opinion. Months after Soros' reaction on the Hindenburg report, OCCRP, an entity funded by him, made nearly similar allegations against the Adani group on the reasoning that it had dug out more dirt from tax havens and foreign jurisdictions.
Also Read: The Modern Shylock: George Soros
Like the Raffaele fighter jet controversy, any news on the Adani group generates heightened emotions in the market since the opposition has linked businessman Gautam Adani and all his dealings to PM Modi to accuse him of nepotism and corruption. Also, the timing of the OCCRP report seemed dubious as India's Supreme Court was scheduled to hear Adani group-related matters, triggered by the allegations of Hindenburg report, in mid-September. Thus, the Soros-backed entity just invigorated the fear factor in India's market. In January, the Hindenburg had timed its report and stoked fear on high valuations of Adani companies, ahead of the group's planned mega follow-on public offer that had to be called off then. The news of Adani's fundraising plans were in the press since he had visited the US in 2022 for informal road shows.
In fact, just two days ahead of the publication of the OCCRP report on August 28, BW had published a story, which detailed how Adani group was on the radar of OCCRP. The BW report even mentioned the key allegations that OCCRP would make against the Adani Group. If an Indian news media outlet can have information beforehand about what is going to be published in the foreign press, it simply means there was prior knowledge about the nitty-gritties of the report to the foreign funds, who used it to build short positions in the Indian market prior to August 31.
Short built-up
Data shows that from net long in July, foreign portfolio investors (FPIs) flipped their positions to net short in the month of August in the index futures segment. In July, FPIs had started with net long positions in index futures at 77,390 contracts, which went on to touch a high of 104328 contracts. Even on the last Thursday of the month on July 27, derivative expiry, the FPIs held net long index futures to the tune of 33241 contracts. In the cash segment in July, the FPIs were net buyers of equities worth Rs 13,922 crore, as per exchange data. But come August 2, the FPI positions started to flip to net short in index futures from 4343 contracts; it went on to touch a high of 41783 contracts during the month.
In the stock futures segment in August, the FPI selling was even more intense. They sold stock futures worth Rs 17,752 crore (approximately $2.13 billion) compared to a measly Rs 14 crore in July. In the index futures, the FPIs were net sellers to the tune of Rs 5435 crore ($0.65 Billion). For the month of August, FPIs stood to be net sellers to the tune of Rs 43,807 crore (approximately $5.27 billion) out of which includes net selling in the cash segment worth Rs 20,620 crore. In August, the FPIs had turned net sellers in the cash segment after a consecutive buying of seven months since March.
The positions in the index futures segment had remained net short till August 30. But a sudden bout of FPI short covering was witnessed on August 31, the day the OCCRP report circulated in the market - a classic case of sell on inside information and reverse on the news. OCCRP had shared the results of its investigation with The Guardian and Financial Times, which carried it as news reports on August 31.
Smart traders are an agile breed, who quickly cover their positions if the idea does not have the desired impact, which seemed the case with OCCRP report. The short covering continued till FPIs went net long sometime in September after the SC hearing on the Adani case. Yet, in the cash segment, they continued to be net sellers in September, which actually helped them cover their shorts will lesser impact cost as the stock prices remained depressed and did not fly off the handle even on the back of domestic buying.
FPI index futures net short (in red).
In green, the client net long
Data Source: Indiacharts
"Behavior of foreign funds in August and September was surprising. They turned net sellers even as India's market indicators and macros remained strong, both technically and fundamentally. Also, there were no major moves in the global markets during that time. If you go purely by the data, the broader markets comprising of small and mid-cap stocks were charting a different course in August since the FPIs could not influence them so much. But index futures and large-cap stocks came under pressure due to FPI selling," said Rohit Srivastava, chief strategist of Indiacharts, well known for deciphering the long and short market data.
Srivastava further points out that India's Services PMI (Purchasing Manager's Index), an economic indicator derived from the monthly survey of the private sector companies, was moving towards multi-year highs. In September, it touched a 13-year high. In August, S&P Global data showed the Manufacturing PMI rose to a three-month high of 58.6 in August from 57.7 in July.
A report from brokerage firm Motilal Oswal in August also displayed the strong fundamentals of India. It reported that companies in the benchmark Nifty equity index had registered a 30 per cent earnings growth in the June quarter. A recent study by Hedgeye CEO Keith McCullough has pointed out that "there's been a clean cut break-out in India's risk range due to its rising PMI and accelerating economic data." Effectively, the macro picture of India defies the market selling of FPIs seen in August.
The Pattern
Just a day prior to OCCRP's publication of the story on the Adani group, news reports said India's Enforcement Directorate (ED) which deals with money laundering investigations, had identified 16 entities, which benefited from the dubious short selling in Adani group shares in January around the publication of the Hindenburg report.
The ED has disclosed to SEBI that out of the 16 entities, three were India-based, with one being the Indian branch of a foreign bank, four were ensconced in Mauritius and one each in France, Hong Kong, Cayman Islands, Ireland and London. The ED said that none of these FPIs had revealed their ownership structures to the Income Tax authorities in India. Further, one of the entities was incorporated in July 2020 and remained inactive until September 2021 had suddenly revved up a turnover of Rs 31,000 crore (approximately $3.73 Billion) and an income of Rs 1,100 crore in just six months between September 2021 to March 2022.
Among others, ED also said that the Cayman Islands-based FII had previously admitted to insider trading and paid a $1.8 billion fine in the US. Most of these FPIs had initiated short positions in Adani Group shares on January 20 and increased their bets on January 23. Also, the Mauritius-based fund, named in the ED report, had engaged in short selling for the first time on January 10.
Like in August, the data revealed that there was frantic trading in NSE’s equity options segment starting from December 2022 up to the Union Budget, which was scheduled just six days after the publication of the Hindenburg report. As a result, the ratio of Put options, which investors buy when they anticipate a market crash, kept rising steadily and touched a 13-year high on January 24: the day Hindenburg published its report.
On January 23, the Put and Call ratio stood at 0.73 (73 Puts against 100 Calls) and touched 0.74 the next day, which is the highest reading since the peak of the Great Financial Crises in March 2009, when the ratio touched 0.75. It simply means that Puts were being added frantically in the Indian markets up to the Union Budget even as the global stock markets were steady or rallying. The probe also showed there was high action seen in out-of-the-money Put options of Adani stocks, which means some were anticipating a sharp fall.
Investor emotions are often driven by strong market reactions. And since the markets did not react too violently to the OCCRP report, the meticulously planned Bear Attack 2.0 on the Indian markets has largely gone unnoticed -- not for the regulators and investigating agencies to turn a blind eye to.
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