'Surprised We Don't Have a Hindenburg in India': Full Text of P.N. Vijay's Podcast Interview

P.N. Vijay, the veteran investment banker, speaks on short-selling, what SEBI could have done and how Indian watchers can alert themselves to non-ethical market practices.

P.N. Vijay, a veteran investment banker, recently spoke to Sidharth Bhatia for ‘The Wire Talks’ podcast on Adani, the Adani Group, the Hindenburg report and its impact on the Indian markets. He said, the Group’s rhetoric that the report hurts India is a “completely childish” reaction.

Below is the full text of the interview. Listen to the podcast here.

Sidharth Bhatia: Hello and welcome to ‘The Wire Talks’. I am Sidharth Bhatia.

The release of the Hindenburg report on the Adani Group, two days before its public issue set off a selling spree not just in the Adani Company, but also in the Indian stock markets in general. Gautam Adani cancelled the public issue, even though it was apparently fully subscribed, which raised further question, and the free fall in the group company shares continues. Adani became not just a stock market issue, but also a political one.

Opposition politicians asked why SEBI, the regulatory institution, had not looked into the group’s companies. And suddenly short-selling was also in the news. Critics said short-selling was not good for the markets, despite it being an old legal practice. And was Hindenburg being unethical releasing a report that preceded its short-selling, on which it presumably made a lot of profit?

To clarify this, we reached out to P.N. Vijay, a well-known investment banker, who has been a commentator on the markets, with a 50-year record. An IIT graduate, he has worked with several banks, Indian and multinational, after which he started his own boutique investment bank. Vijay was associated with the business channel, CNBC, as a stock market expert and also associated with the BJP as its national spokesperson on economic affairs. P.N.

Vijay, welcome to ‘The Wire Talks’. 

P.N. Vijay: Thank you, thank you for having me here.

Sidharth Bhatia: Before we move further. A simple question is, is short-selling an unethical activity?

P.N. Vijay: Not at all. Short-selling is legitimate market equity. Everybody does it at some point in time. I’ve done alot of it myself but it’s a specialised form. It’s not for weak hearts or innocent kids who are dabbling in the matter.

The reason is – what is short-selling? In short-selling, a person is a seller, an investor who is selling shares that he doesn’t have, hoping that the analysis he has made, that those same shares will fall considerably over time and he will buy those shares and make money.

Let me give you a very simple example. Let me use Adani, which right now is the khichdi of the month. Adani shares, about a year ago, were at Rs 4,000. Many people would have felt that the Adani shares are very highly priced. Because if you use conventional matrices, like earnings per share, price-earnings ratio, market cap per sales market, whatever standards, the peer group comparison, the shares are very highly priced. So you take the view, “Hey listen, there is an opportunity, let me sell these shares, these shares are about to fall at some time.”

The problem is as a seller, I don’t have the shares. And then…when you sell the shares, after two days, you have to deliver the shares. So what you do is you go and borrow the shares. You tell your broker, “Listen, I want to short Adani enterprises about Rs 5 crores. Can you arrange Rs 5 crores of shares for me?”. He’ll do it, because in the market, this mechanism operates very well for large stocks. But he says, “Sir, Mr. Vijay, it’ll cost you about 12% per month as interest on the shares you borrow.”

I say, “Fair enough, to make bigger gains. So I borrow Rs 5 [crore], I have a proper agreement with the broker, blessed by the exchange. It’s very prim and proper. Then I go to the market and sell Rs 5 crore worth of shares. 

Some Johnny, you know god bless him, buys the shares at Rs 4,000. Then I am sitting. Then people realise Adani is not such a great stock to be valued at Rs 4,000. And the share, as it happened, came down to Rs 1,700 within one year. I made a bomb, right? So what do I do? I go into the market and buy back those shares. When I buy back those shares – I invested Rs 5 crores to buy it – I am paying only Rs 1.8 crores. That’s quite the transaction, And I am making a Rs 3.2 crore profit.

Also read: No Formal Position in Listed Adani Entities But Vinod Adani Plays a Key Role in Empire: Report

Sidharth Bhatia: But it’s a risky proposition, no?

P.N. Vijay: It’s a very risky proposition and, Sidharth, I’ll tell you why. One because then you are a long buyer rather than a short-seller. Your loss is consigned to your investment, right? Let’s say you bought shares for Rs 100, it’s a thousand shares for Rs 100. You have invested how much? Rs 10,000. That’s your loss. Let’s say that share goes to zero, you’ve lost Rs 1,000. But in the case of this Adani, what I said, share of some Rs 4,000 might go up to Rs 10,000. Your loss is unlimited. There is no limit to your loss.

That’s why short-selling is to be done by people with deep pockets, who have good understanding. Now, short-selling is used for two reasons. One is for speculation, which I just now said. Short-selling as speculation means you buy a stock, which based on your analysis, is bound to go down. You borrow the stock, you short-sell it, and then buy it back and make a good profit.

The second is hedging. People like us who manage large portfolios use short-selling for hedging. What is that? 

Let’s say I’ve got Rs 10 crores worth of Infosys [stock]. Okay, I am now getting a bit nervous with Infosys. I find that Google is falling and Microsoft is falling, IT sector is having lay-offs and all. So I want to be a bit careful. On the other hand, I have held this Infosys stock for a long time and I don’t want to sell the Infosys stock. So I build what’s called a short position in two phases, doing the same thing, which I said. Then I’ll hedge myself. So, we call it short-selling, is used by professional investors for speculation and for hedging purposes, hedging being an insurance you take against an existing stock. 

But going back to your first question, short-selling is pretty legitimate, it happens all the time, but it has to be done very carefully and I would suggest by very, very knowledgeable people, with fairly deep pockets.

Sidharth Bhatia: Yeah, P.N., there have been famous past instances of mega short-selling. For instance, during the time of Harshad Mehta in the ‘90s, early ‘90s. 

P.N. Vijay: Yes. 

Sidharth Bhatia: So at that time there was this talk that the short-sellers had actually exposed the big bull. And this time, there is a lot of criticism of the short-seller. It’s a very strange situation. 

P.N. Vijay: Yeah. And that time the supposed villain was Harshad Mehta and it was said that he had, you know, through speculation and market manipulation taken some of his favourite stocks, like ACC and Apollo Tyres, very high. So a group of short-sellers got together and hammered the stock down. Their intention was to bankrupt Harshad Mehta.

So the system of that time was that, in your crew, if you do anything to bring down the crook, you are a virtuous person. I think it is not wise to make judgments like that, as a market participant. I can only say that short-selling is very good thing, because it’s a governor, you know. In fact, many people will say that when the markets are down.

I’ll tell you an example. The markets were very down in 2008 and all. Who brought the market up? Because you and I were very scared to buy in the market. Everywhere there are Lehman crises and this crises and that crisis. It is the short-seller [who is necessary], because the short-seller said, “mera pet bhar gaya (my stomach is full)”. And heavily, if you see the data of 2008, March-April, you’ll find for one month, the buying was only done by short-sellers because they felt, “We have made a killing. Markets can’t go below this,” and [then] they went up.

Then, everybody was praising the short-sellers. The market found a bottom because of the short-seller. So, short-selling is a technique. It’s, I would say, a market equalisation technique. 

Also read: Explainer: Everything You Need to Know About Short Selling, and How it is Done in India

Sidharth Bhatia: But now the short-seller is the villain.

P.N. Vijay: Yes. The Hindenburg report has made short-selling look like, you know, a bad thing, or [the short seller] a villain. But in, you know, that slice, people talk about things, which they don’t really understand of. Yeah. So I think yeah, that’s what it is. You and I know it, yeah.

Sidharth Bhatia: Okay, let’s come to the Hindenburg report. Do you think that Hindenburg’s open admission that it is a short-seller…is there a conflict of interest? 

P.N. Vijay: Not at all. In fact, most short-sellers try to conceal their identity.

To be honest, in the market a buyer also conceals his identity if he doesn’t want the market to go against him. The short-seller also wants to conceal his identity. I am surprised that Hindenburg went out and said, “Hey guys, from tomorrow morning, I’m going to short-sell Adani.”

If I was shorting it, I won’t be saying it. So, it is, I don’t know, maybe that’s their tactic, or the markets in which they operate…see, they don’t operate in the Indian market. They short-sold derivatives of the Adani stock. They didn’t short-sell Adani’s stock in India. They don’t trade in India. So maybe in those markets, if you’re doing major short-selling, it’s possible that you may have to inform the exchange of that fact.

Not very clear, but it’s rather unusual for them to declare. 

Sidharth Bhatia: Not exactly as Hindenburg has done. People are still confused.

P.N. Vijay: Hindenburg – I don’t know them personally – Hindenburg is a five-year-old research firm, and their mission is where they believe there are companies whose shares are highly inflated and are not worth anywhere near that price, and this inflation is happening due to false accounting being done internally and [through] market manipulation, both of which you’ll agree are highly illegal things. False reporting and market manipulation.

They research those companies. They take one or two years, research that and bring out fairly damning reports. This is the sixth report that they have and to be honest, wherever they have done these reports in a post-mortem, what they have said has come out right. In fact, the last one they did of a Chinese company, it ended being delisted from the NASDAQ, and that company has gone into insolvency. Obviously, their result so far has been good. 

Gautam Adani. Photo: Adapted from Chirag200201/Wikimedia Commons, CC BY-SA 4.0

Sidharth Bhatia: What do you think is the weakness they would have found in the Adani group?

P.N. Vijay: Now that report if you read it is very, very simple. They are pointing out three or four things, just to recap.

Now, most people know it. On the financial side, they are pointing out two major weaknesses. One thing they’re saying is this company has borrowed too much money, what we call the debt-equity ratio. We call it level of equity or promote owners’ funds. The debt, it is very high by any standard, which makes this company a very weak company, they are saying.

They’re also pointing out that a lot of the shares the Adanis themselves have are hedged to banks. And they’ve taken more money, which means that doesn’t really qualify as equity. Let’s say for example, there is a company with Rs 100, out of which Rs 30 is equity and Rs 70 is debt. So the debt-equity is 1:2.33, which is quite high. Normal ratio, is 1:1. Now in that Rs 30 also, if you have borrowed Rs 25 against that from banks, then your skin in the game is only Rs 5, isn’t it?

So, they’re pointing out this company, the Adanis, have very little skin in the game and it’s all borrowed. 

Second point they’re making is something called the current ratio. Current ratio is the liquidity the company has. They’re using various parameters. They’re showing that current ratio has to be normally 1.5-1.6 for a good company. They’re saying it’s less than 1. So it’s saying this company will have huge liquidity problems going forward. This is the financial aspect. 

Second, they are saying the accounting, the statutory auditor is a very small firm.

Sidharth Bhatia: Correct.

P.N. Vijay: Being so it is likely to be subject to rules and pressures of the big people in that area, Adanis. And it’s no doubt true. I serve on several boards, it’s no doubt true that when a company reaches a certain level, the promoters themselves or the lenders insist on a large [accounting] firm, with international exposure. Adanis have a lot of international exposure, currency exposure…should audit the books.

The idea is that such firms will not be subject to any pressure, will be impartial, will be knowledgeable. But that didn’t happen and Hindenburg pointed that out.

Another important point Hindenburg made is a slightly technical point. In India, Sidharth, for the company to be listed – listed means traded on the stock exchange – at least 25% of the shares should be in public hands, and promoters cannot have more than 75% of shares. In Adani’s case, out of that 25%, Hindenburg is saying that a large percentage is held by overseas entities whose only investment is in Adani shares.

So they’re saying that the effective liquidity of the stocks is very, very little, which is why MSCI is seriously thinking of moving them out of the index, because MSCI is a liquidity-based index. So their point is, since there is hardly any liquidity, Mr Adani is able to manipulate his share prices very easily. These are the points or allegations as we would like to call them, Hindenburg has made and levelled. 

Sidharth Bhatia: Now these technical facts must have been known to a lot of people in India, no? 

P.N. Vijay: I don’t know a lot of people, but people in the industry, usually, in India. I don’t know, surely the financial aspects it has said would be known to most people – I’d say most of the lenders at least – because lenders know to pick these things with a toothpick.

The liquidity aspect of it, people like me knew, because we were in the market, we invested in companies and so on. But the normal investor, I don’t know how much is the free-float, how much is the free public shares controlled by entities. That’s something I would not say is common knowledge, but people who are deep into the markets would know – most portfolio managers, most mutual funds. 

Sidharth Bhatia: Surely there was a case for SEBI to look at it at least. 

P.N. Vijay: Yes. Yes. See, it’s the honest market manipulation that goes on all the time, you know. 

Sidharth Bhatia: Please repeat that.

P.N. Vijay: Market manipulation goes on all the time, okay? In all markets, because it’s green, right? And regulators, and I should say the Indian SEBI is very well-positioned. I would say I’ve been in the market for 50 years and over time, they’ve built up very, very good surveillance of SEBI and National Stock Exchange where it is very much within their realm to identify market manipulation, meaning, how you manipulate a share.

You do circular trading. You have 3-4 of your own companies, which keep on trading among themselves, okay? It’s like a spiral, you take it up. Now, you are going to have to be very smart about it, but it’s not rocket science. It’s done. So if SEBI were to conduct an inquiry, it will not take them more than four or five working days to establish whether there was market manipulation. 

Sidharth Bhatia: So, why didn’t they?

P.N. Vijay: Well, I think they going to do it right?

Sidharth Bhatia: A bit too late, no?

P.N. Vijay: Well, better late than never no? Yeah.

Sidharth Bhatia: So are you suggesting that there is prima facie reason to look at, I’m framing this very, very carefully, prima facie reason to look at something, even before the Hindenburg report?

P.N. Vijay: I don’t have enough evidence to comment about that, because it’s a complicated question, in the sense that if you look at the movement of the Adani stock on the NSE, it is around this level, Rs 1,800, last early March, then it went up to Rs 4,000.

Sidharth Bhatia: Correct.

P.N. Vijay: In early Jan. So that’s more than a double rise, but it’s happened over nine months. So yeah, it’s difficult to say whether there was enough red signals for SEBI to launch an inquiry. 

Sidharth Bhatia: But lenders at least should have had some red flags.

P.N. Vijay: Yeah, lenders I think, but lenders are happy because they were getting their repayments. It’s a good question, not thought about it that way. I think, to be honest, lenders should have been a bit more…

Sidharth Bhatia: Vigilant.

P.N. Vijay: Vigilant, because the financials are not good, sure. And they were acquiring ACC Cement and they acquired NDTV, they were bidding for DB Powers. They were bidding for 50 airports. I mean, they were on a very aggressive growth path. If I were a lender, I would raise my hand and say, “Hey, listen, let’s have a chat. This can’t go on.” I would have done that, but I don’t know about that. On the movement, I would say probably, the share movement in the last few days before issue, you know, the issue was just pulled off, you know.

Sidharth Bhatia: Yes. 

P.N. Vijay: The few days before the issue the share went very high, whether that could have called for a quick inquiry I wouldn’t know, but I would need more data for that. 

Sidharth Bhatia: Well, I understand your constraints, but the papers here never wrote about Adani, in any kind of investigative way. SEBI which you said can really look at it in four or five days, did not do anything. Lenders were happy to lend, as you’re saying. Public float was low. All these factors together is what Hindenburg spent a year, year-and-a-half putting together. And therefore, there was enough material in the public domain, and yet nothing happened. 

P.N. Vijay: Well, you know, it’s difficult. Public domain…[there are] different constituencies to the public domain. There are bankers and lenders, they are not bothered too much about the share price situation. They are looking at internal financials. So I think they could have done something. To be honest, I don’t think there was enough, let me say hawa [wind] to at least – I’m not so close to this transaction – for SEBI to just send us down saying we are investigating Adani’s share price movement. 

Sidharth Bhatia: So do you think Hindenburg sitting far away, a small organisation of some few people had none of the constraints that Indian institutions would have had, including trading houses?

P.N. Vijay: Well, you know, this financial market as the lending side and the cap market side, in India they’re pretty well insulated. A company can be. Adani in his reply said, “I’ve been getting very good credit rating, from the raters, and you know, they’re satisfied with our financial performance.” So that might have had a bearing the lenders.

On the equity side, which is where SEBI comes in, your point is whether the runner for the shares of the last one year justified investigation by SEBI even if there was no complaint or anything like that. That’s a moot point, that’s a moot point. But your point is right, Hindenburg put it all together, nicely. There were, you know, people like Sucheta Dalal, and others like that, who’ve been talking and writing about shares. Even one or two of the MPs I think, I have been keeping track of it. So there were enough people like us, who were so much in this line. We all knew that these types of people had been raising pretty major concerns.

So let’s put it this way. It did happen and investors have lost money, even people at a higher level.

Sidharth Bhatia: Yes, that is true. And the way the shares have been falling, I was just seeing the table of shares that have fallen in the Adani Green. It has fallen by 67%!

P.N. Vijay: Yeah.

Sidharth Bhatia: Some others too. This is not the kind of fall that can be recovered soon or swiftly.

P.N. Vijay: Not, I mean, for a very, very long time. 

Sidharth Bhatia: So obviously a lot of people are going to lose money.

P.N. Vijay: Yeah. they’ve lost money, why “going to lose money?” They’ve lost money.

Yes, yes, that’s the sad thing, you know, in all this, the banks, of course some people have been saying, Rs 2 lakh crore exposure, the Adani company’s default and the Indian banking system, I mean Rs 2 lakh crores is not a small amount. So they would have huge, huge haircuts, and I don’t know if that type of thing is going to happen because as the Adani companies have good assets, some are airport assets. 

Sidharth Bhatia: So it anyway we not going too much into Adani. Though, there is word that they might be asset sales. 

P.N. Vijay: Yeah yeah yeah, but I mean, our excitement was about the whole concept of short-selling and how to make money out of it. 

Sidharth Bhatia: The Adani group called it an attack on India and invoked nationalism. There was a flag flying and all that ka-tching. Is it really an attack on India?

P.N. Vijay: Oh not really. It’s not at all I think. This is a type of [incident reminiscent of], you know, Dev Barua in the late ‘60s, early ‘70s, the Congress president, who said, “Indira is India and India is Indira”.

You know, when these things come, you know, it’s not good for Adani, you know. Nobody thinks that you know. And India has gone a long way. If you look at the Indian bourses, over the last 30 days, we had debt, and etc., etc. We have just shrugged off the Adani imbroglio. The Adani stock is not even on the Sensex of any stock as of now, one or two percentage weight in the NIFTY. So the big point there is that for Adani to think that the entire nation is concerned, I think this, in my mind, this is childish. It’s childish, and I’m happy that people just ignored it, you know?

But this type of rhetoric is not expected from a business. I think, you see, when a businessman is in trouble, and you know many businessmen are in trouble, business is all about risks and syntax and all. You handle it professionally, you don’t invoke rhetoric. You call investor conferences, and try to explain. It is like that. I would have expected him to do that, but he didn’t do it, which is a bit unfortunate.

Sidharth Bhatia: You mentioned a little while ago the haircuts. LIC says they are well within control. 

P.N. Vijay: I really don’t have enough data. See, some of these companies, LIC, for example, they might have gotten in the basement, at Rs 10 per share. You know, right in the beginning and Adani has been around for a long time. So let’s say half their portfolio has Rs 10 or Rs 20 and half their portfolio is at Rs 3,000. What could be very interesting for any sharp mind to see is in the last two months, if the institutions have been propping up the share prior to the issue. That would be interesting, whether they were buying at Rs 3,000-3,500. Anybody can do it, look at the data. But then, not anybody can do it.

Also read: LIC Investments in Adani Group Stocks ‘Turn Negative’: News Reports

Sidharth Bhatia: And finally, how can an Indian company, and we are talking only of Indian companies, protect itself against such an attack, such a situation, such an exposure? How can they do it?

P.N. Vijay: Well, by having sound financial integrity, let me call it.

You know, if your company wants to grow, there are some very, very basic principles. You put should borrow within limits, your liquidity should always be good. That means you must have three to four months of cash to meet your liability. Both are cardinal principles of finance.

You see your desire to grow, throw it to the winds with those cardinal principles, and start rotating money, or start raising your share price, then you know, you have to pay for it. So, my only advice to Indian companies is, see business is all about risk. What do you want? There are market risks, regulatory risks, etc. Why do you want to add financial risk to it? Why don’t you grow a bit less? Why do you want to buy 50 airports, try to manage the airports you already have.

So if you are able to have financial prudence, which is what many good Indian companies do, you know. I mean, India has some stellar companies. So if with some little equity you try to blow up and start acquiring this and acquiring that…In fact, people like us question the ACC acquisition, the biggest cement company. We said, why were you into our boards, etc.? Why you want to get into it? But then, this is not good. Things will catch up with you. It’s very brutal. 

Sidharth Bhatia: Just one last question PN. 

P.N. Vijay: Yes Sidharth, tell me.

Sidharth Bhatia: Was there a factor X at play in Adani’s growth? 

P.N. Vijay: You know, I’ve been asked this question several times. I don’t think so.

Sidharth Bhatia: And that factor X, if you want, I will fully qualify it because I’m not hiding behind anything and that is political influence.

P.N. Vijay: You know, I don’t think so. To be honest. See, Adani has come up very fast. He is a Gujarati businessman and Prime Minister Narendra Modi, had a stint in Gujarat, he developed his state, and had an excellent relationship with all the entrepreneurs of the state. So it’s obvious that people would say that Mr Adani had the patronage of people. But to be honest, the projects, which are undertaken are very difficult. Mundra port and power transmission, they’re very difficult projects.

So, to my mind, at least, forget my BJP background, forget my BJP leaning, to my mind at least, there is not enough evidence to say that Adani growth is attributable to factor X, as of now. 

Sidharth Bhatia: But on the other hand, you know, that you don’t get six airports, just like that.

P.N. Vijay: For that, I know so many Indian businessmen.

Sidharth Bhatia: With no background?

P.N. Vijay: I sit on the board of some of the largest Indian companies. I tell you what Adani has which other Indian businessmen don’t. He has a lot of spunk, I tell you that guy, he bets the shop.

You know, I’ve looked at these airports. I looked at these. Some other business friends of mine, they say, “These airports and all won’t make any money. This UDAN and all are a disaster, I don’t know why that guy is going.” They question the financial viability of such projects. So I would rather say that he is in a way rushing in where angels fear to tread, I mean, why would you buy airports in some Shimoga and some Dibrugarh, I mean, the economics of it I don’t understand.

But again, nobody has done enough research, Sidharth, on these things. I’m surprised there’s no Hindenburg in India, I want people to go…then maza aata hai. Right now, we’re talking a little bit in the realm of speculation.

Sidharth Bhatia: Maybe you could start one.

P.N. Vijay: I’m too old for that.

Sidharth Bhatia: On that note, really you have explained the whole thing, you know, with naturally, without sufficient data, but I may still say, as somebody who follows business but not deeply entrenched in the financial markets, that I think even lenders and others played fast and loose, and there were occasions that they could have really raised red flags, but you have pointed that out. So thank you P.N. Vijay, veteran of the markets and an investment banker for the last so many years. Thank you very much.

P.N. Vijay: Thanks Sidharth, I’ve enjoyed talking to you today. Keep in touch.

Sidharth Bhatia: I shall. I shall. You can check out this podcast and other interesting ones on The Wire website, the IVM podcast website, app, or wherever else you get your podcast. Goodbye from me, Sidharth Bhatia, and ‘The Wire Talks’ podcast team. 

Transcribed by Prashanthi Subbaiah.