MUMBAI : A single market participant took a derivatives position worth an estimated ₹600 crore in Adani Enterprises Ltd (AEL), flagship of the Adani Group and a Nifty 50 stock, just days before India’s markets regulator submitted its status report on the Adani probe to the Supreme Court on 25 August.
While it’s not known whether the position is a hedge or a punt, market experts said such positions are normally taken in anticipation of a sharp price move based on an event.
Designated ‘Client 1’ by National Stock Exchange (NSE), the participant initiated a position of 2.24 million shares, or 3.04% of AEL’s marketwide position limit (MWPL) of 73.7 million shares on 22 August. Based on the closing price of the AEL active futures contract on that day, the cost of the position is ₹607.25 crore.
However, the equivalent cash margin a client has to put up to trade an AEL derivatives contract is 65%, or ₹395 crore, in this case. This position is termed open interest, as it signifies an outstanding long or short position.
The last time a client held over 3% of AEL’s total futures and options positions was on 31 March after a sharp recovery in its share price after marquee asset manager Rajiv Jain of GQG Partners first invested $1.87 billion in four Adani group companies, including in AEL, earlier that month.
A futures or an options contract facilitates the purchase or sale of an underlying security at a fixed price for delivery on a future date. If the client has a buy position and the stock rises at expiry (last Thursday of the month), she makes a gain. If the stock falls, she loses.
Similarly, if she has a sell or short position and the stock corrects by expiry, she gains. But if the stock rises, she loses. She also has the right to roll over her position to the next month on anticipation of an event which is favourable or adverse to the company.
In the current context, Securities and Exchange Board of India (Sebi) was to submit its report on the Hindenburg allegations against the Adani Group to the apex court on 14 August. However, it sought a 15-day extension, up to 29 August. Sebi submitted its status report to the top court on 25 August. Though the contents of the report aren’t public, they pertain, among others to a probe into Hindenburg’s allegations against the Adani Group of related-party transactions and a violation of minimum public shareholding norms, among others. The group has denied any wrongdoing.
Given this context, the position taken by the participant indicates anticipation of a sharp price movement in the stock. At times, when traders take such huge positions, the stock moves into a futures and options ban, which means no fresh positions are allowed, and only existing positions can be closed out until the ban is lifted.
Asked about the nature of entities that take such large positions, Shyam Sekhar, the founder of ithought, a Sebi-registered investment adviser, said, “The large positions driving stocks into ban are speculative, created by entities with the mindset and structure of hedge funds. These are initiated in anticipation of some event, either favourable or adverse, which could impact share prices significantly on either side. The counterparties to these trades are retail individuals who invariably lose out to the large speculators.”
A market analyst said, on condition of anonymity, just as Sebi rules mandate the identification of investors holding a percentage or more of the equity capital of a listed firm, the names of the investors or traders holding a major part of open positions on an underlying stock’s derivatives contracts should be disclosed.
Stock exchanges identity the entity as a Client and rank them by the percentage of total positions held. For instance , the client with the highest percentage of positions held is referred to as Client 1, that holding the second -highest as Client 2 and so on.
US short seller Hindenburg Research in a report on 24 January alleged corporate malfeasance against the Adanis, which the conglomerate has rubbished. Following this, in May, the SC directed Sebi to submit a status report on the allegations.
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Updated: 27 Aug 2023, 11:40 PM IST
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