Transmission

Under the hood.

The short seller says the shares are 85% overvalued.

For the lead company 3 million shares trade a day with a free float of less than 25% of the equity. Earnings were 10 a share for the trailing year valued at 253 times earnings at Fridays close. Think of the number for a moment which implies it would take two and a half centuries to recover the investment.  14 million shares traded 20% lower. 85% lower is 30 times trailing earnings. Value is in the stamina to reach the horizon.

The short seller casts suspicion on 8 stocks included in the MSCI Emerging markets index. The country has a 14% weight in the index with 108 companies. The 8 in question account over 5% of the index.  The index has a reputation to protect and holds 1300 companies globally.  The weight of the eight might be an inconvenience for the index to defend.

Then there is the matter of a follow on public offering that was priced 20% higher on 27 January and is now more expensive than the stock price trading on the exchange. There were no willing retail buyers at that price.  ICICI Bank which as an underwriter technically buys the shares for resale to the public traded lower by 4% in US capital markets where it is has a dual listing.  Pension funds and insurance companies were 20% less well off but still up eight times from entry on paper,  if the paper holds.

The transmission. 

Credit default swaps let bond buyers insure against default risks by issuers. 

The 6.25% 500 million USD bond trades at seventy five cents on the dollar, 25% lower than issue price. The default swaps, which presumably the short seller holds, increase by multiples as the bond price declines. Think the Lehman moment in mortgage backed securities 2008. These swaps trade over the counter meaning the buyer contracts directly with a seller, financial institution, which in turn has to hedge the risk on or offshore. Holders of onshore equity are just along for the ride.

The question not yet posed is whether the risk is restricted to the eight or is an indictment of the system and might be found in the 413 pages issued in defence and the short sellers response to the defence.