AA Edit | Hindenburg shutdown raises a lot of questions
Nowhere in the world could the shutting shop of a short-seller have hogged headlines as it did in India. When Nathan Anderson, the founder of the American short-seller Hindenburg Research, announced his decision to wind up the activities of his investigative company, it triggered a celebration marked with vindication among the supporters of the ruling Bharatiya Janata Party. On the other hand, the development led to bewilderment in the ranks of the Indian National Congress that, led by its MP Rahul Gandhi, used Hindenburg reports on some companies of the Adani Group to target Prime Minister Narendra Modi.
In the absence of its high-profile attack on the Adani Group and the Congress’ decision to use this to attack Mr Modi, Hindenburg Research would have been just another short-seller that makes money by betting on a probable fall in the stock price of its target company.
Since it was established in 2017, Hindenburg has targeted 63 companies. Of them, nine companies have lost their entire market value. The net worth of 35 companies has halved after the publication of Hindenburg’s reports. Of these, two were Indian — Bollywood movie production and distribution company Eros International, which was shut after the Hindenburg report, and the Adani Group, which made a smart recovery after an initial blip.
While Anderson attributed this move to shut his company to his intentions of focussing on his life beyond short-selling and his family, there is speculation that the incoming US administration led by President-elect Donald Trump could be investigating Hindenburg for selective targeting of companies, and his alleged links to China and another world-famous short-seller, the billionaire-philanthropist George Soros. Indian market regulator Securities and Exchange Board of India (Sebi) has also been under the scrutiny of Hindenburg as one of the beneficiaries of its report had invested in Adani stocks through Indian stock exchanges.
Though Hindenburg claims that its investigative reports are fair and exposes corporate irregularities, the practice of going short on its target companies based on exclusive information through funds of its own and its affiliates raises ethical questions. A fall in share price reduces the value of the company and its shareholders’ wealth, and may put other stresses on the company, including bankruptcy in extreme cases, and resulting job losses.
However, the investigators argue that they are beneficial to the long-term interests of the market because they engage in uncovering fraudulent and/or unscrupulous activities. They expose the rot in publicly listed companies through forensic accounting and other methods. This kind of investigation entails a great amount of expenditure, and there are no agencies or institutions that proactively try to find out irregularities in the companies, which ordinary people believe in. The investigators justify financial benefit occurring from their research by shorting on their target companies.
On the other hand, businesspersons have to navigate their businesses by satisfying the interests of various stakeholders — which could at times fall in grey areas. Unless some external entity points out these grey areas, regulators cannot fix them.