Bear cartel hand seen in $100­b rout in Adani shares

Bear cartel hand seen in $100­b rout in Adani shares

Subject : Economy

Section :Money Market

Concept :

• An initial probe by market regulator SEBI and government agencies suggests that a bear cartel may have triggered the $100­billion rout in the share price of Adani Group companies through the use of highly potent structured product derivatives (SPDs), tailor made by foreign banks for high net­worth traders and funds.
• SPDs, like Participatory Notes, keep the identity ofthe ultimate beneficiary hidden.
• By India’s tax and SEBI laws, short­ selling of domestic stocks outside India is illegal.
• But the probe reveals huge trading in Adani stocks outside the country that had a domino effect on domestic markets as the volatility increased.

Bear cartel

• In the stock market, bears are those who identify problematic companies and short-sell them.
• Short selling means that traders sell the shares of a particular company without owning them.
• They can do this by borrowing shares from other shareholders or by going short in the futures market.
• To create maximum impact on the share prices, the traders create a group termed as a bear cartel.
• Since the bears attack a particular stock or group of stocks in order to gain from the fall in price, the action is performed normally in times of stress and bad market conditions.

How it happens?

• Bears identify companies with relatively weak fundamentals to maximize gains.
• For example, if a company has very high debt on its books and if there is news that it is facing problems on the cash flow front, the bears will quickly get into action and start selling that stock.
• Since there is a group of people acting in a coordinated fashion, the impact is higher. As the stock price start falling, even normal shareholders get nervous and start selling, which leads to a further decline in the share prices.
• Once the prices fall significantly, the original short sellers cover their positions and gain from the fall.

Example :

• Let’s assume that a bear borrows a bunch of shares when the price is 100 per share and sells it in the market. Due to heavy selling pressure, the share prices collapse to 50 after a period of time. Now the bear will buy at 50 and return it to the shareholder.
• Assuming there is no transaction cost, the bear will gain 50 per share. Similarly, in the futures market, the bear will short sell at the prevailing price and square off his position at a lower price.

Structured product

• A structured product is essentially a customised financial instrument that utilizes various investment avenues and combines them in a package.
• Structured products or market-linked debentures are products where majority of the money is invested in fixed-income securities and the smaller portion in derivatives linked to a assets such as equities.
• The risk factors and the return objectives of structured products are not fixed and can vary per the needs of the investor.
• Structured products utilise traditional underlying assets, but the returns from the underlying assets are swapped with derivatives.
• Structured products include bonds, equities, and derivatives as the principal assets.
• Bonds and equities together generate returns and derivatives act as the determinant of the overall risk involved in a structured product.
• Derivatives help customise the returns from the underlying assets to meet the unique requirements of the investors.
• Usually, structured products combine different asset classes to create a mixed investment portfolio. A structured product balances the risks it undertakes by including secure investments as part of the portfolio.
• In India, the minimum value of a structured product investment is INR 10 lakhs.

Participatory notes

• Participatory notes (P-notes) are issued by registered foreign portfolio investors (FPIs) to overseas investors who wish to be a part of the Indian stock market without registering themselves under SEBI directly after going through a due diligence process.
• The increase in P-notes investment is in line with the higher net inflows of Foreign Portfolio Investors (FPIs) in the cash segment.
• P-Notes are Offshore Derivative Investments (ODIs) with equity shares or debt securities as underlying assets, as they are used by the investors abroad but not within India.
• They provide liquidity to the investors as they can transfer the ownership by endorsement and delivery.
• While the FIIs have to report all such investments each quarter to SEBI, they need not disclose the identity of the actual investors.