By R. Chandra Mouli
Now that India is on their target map, the folks at Hindenburg Research can consider a crash course in Hindi, the language spoken in many parts of the country. More on that later.
Of the two “Research Reports,” the first was aimed at an industrialist. India is a nation that’s emotion and sentiment-driven, and negative reports are the first to get read. The January 2023 report led to expected outcomes – a drop in valuation, a fall in stock prices in the flagship and subsidiary companies, and a call from the opposition to probe the alleged nexus between the government and the industrialist.
Fortunately, our core sector, industry pillars, and captains are not of the house of cards or sandcastle variety. The group in focus regained relevance and overcame what turned out to be a storm in the research teacup.
For the sake of simplicity and greater clarity, let’s break down this narrative into three parts:
Research firm in focus
Hindenburg is known for taking a ‘short position’ on companies that are the subject of its research. While disclosure of such a stance is appreciated, investors should also be aware that the research firm may have a vested interest in the exercise.
Let’s understand going short on a stock: According to the Corporate Finance Institute, USA, short selling is the practice of selling borrowed securities – such as stocks – hoping to make a profit by repurchasing them at a price lower than the selling price. When you sell short a stock, you can profit from a decline – rather than an increase – in price.
Also read: Hindenburg Research targets Nasdaq-listed Super Micro Computer in the latest report
There are multiple ways of going short – for example, one can take a position in the options market. Further, a research firm shares its report with hedge funds and the fund may decide to buy or sell a stock based on the analysis. In this case, the key observation of the industrialist’s group was stocks were manipulated and there were undisclosed related party transactions. Which explains the tumble in price. However, no one could factor, fathom, or predict the India story, rather our history of resilience.
Let’s take a parallel incident as proof of the axiom: A report was released in 2011 by another research firm, also a short seller, on an outdoor media company operating in China. Some of the accusations in the report led to a drop of 75% in valuation in three days. The research firm profited and so did their clients.
The Herculean Indian securities ecosystem, however, withstood the report released by Hindenburg last year, and most of the stocks of the group in question bounced back within around 100 days, made a smart recovery, and after one year has returned to what is now termed as pre-Hindenburg level. Our retail and bulk investors made their judgment and acted as per reasoning and intellect, which is proof of a mature market at work.
Regulator in focus
More recently, the report writers, who could be avid fans of Oscar Wilde’s ‘The Importance of Being Earnest,’ or at least the title, hit at another institution in all earnest – a market regulator this time – and the claim was about the bureaucrat heading it. The second missive too failed to act as fodder, for the following reasons:
- The allegations were about investments made by the regulatory body chief and her husband in an offshore fund – but the Chief Investment Officer of the fund in question has declared he had not invested in any of the companies against which the first report was centered (even if we don’t take his word for it, until such time proof emerges to the contrary his affirmation stands good).
- The connection seemed convoluted – the CIO happened to be a childhood friend of the husband and interconnecting his role as a past director on one of the group companies of an industry captain seemed quite a stretch.
- During the offshore investment timeframe, husband and wife were private citizens and residing in Singapore – two years before the lady’s appointment as whole-time member of the regulatory body.
India in focus
For corporate India, the repeated exercise by Hindenburg Research seems to be an effort to create ripples in the stock market, and in American style, try to fix something that ain’t broke. Engaging in the Indian stock market has its benefits – you find the ammo, fire it in the form of an in-depth research report, and the stock slides, and there could be those in the know who can buy at low levels and sell when the stock returns to its earlier level.
The above reasoning does not discount the value of investigative financial research. For decades, market analysts have been putting out warnings on overvalued companies. However, the credibility of recommendations and revelations depends on the neutrality of the research firm. When the company has a parallel activity stream of short-selling, the open market investor must exercise discretion.
Let’s look at the big picture – our economy, stock market, and growth indices. Compare our situation with some nations with whom we share land borders and some who are a ship ride away. We have excellent and enviable infrastructure, sustained increase in industrial production, and are home to businesses that are booming and attracting foreign investment. On the socio-economic path, we have come a long way in the last ten years – in healthcare, health insurance for the underprivileged, education, sanitation and much more.
If our rise as a global power irks some outsiders, it’s no skin off our nose, because we know we will scale to a higher ranking than where we are now – the world’s 5th largest economy. To the research firms of the world, we say, look at the bright side of Bharat and let us know if you can find a comparable country in terms of stability, growth, and non-interference. If you insist on unveiling more trivialities in your reports, we will in Oscar Wilde style, treat all that you present as serious accusations with a sincere and studied triviality.
As for the Hindi lesson – we have a question – are we that important you must constantly poke your nose in our matters… or as Ms. Madhabi, I meant Madhuri, might say, “Hum Aapke Hain Kaun”?
(R. Chandra Mouli, a former journalist and advertising professional, is a regular contributor to Financial Express. Views expressed are his own and not necessarily those of financialexpress.com).