Law of One Price? Not in India!

The 'law of one price' posits that the price of an identical asset or commodity will sell at the same price globally, regardless of location, subject to certain conditions.

Public, exchange-traded equities are such an asset. For if a trader could buy a security at a cheaper price on one market, he'd do so and sell the security elsewhere. This is the foundation of arbitrage and the mechanism by which prices converge to one price. This process undergirds all the concepts of market efficiency that are ascribed to public equity markets around the world.

That is why what we just saw in India is astonishing. It flies in the face of all notions of efficient markets, and illustrates why Indian equity markets are a different animal still.

Several weeks ago, Adani Enterprises (ADEL.NS), one of India's largest conglomerates, announced a $2.5 BN follow-on public offering (FPO) for additional CAPEX for projects like green hydrogen power, airports, and new highways, and, not incidentally, to pay down debt at the highly levered company.

Bidding started on January 25 and the window was to close on January 31. It was priced with a floor of 3,112 rupees per share and a cap of 3,276 rupees, with a discount of 64 rupees for the retail segment.

Then Hindenburg hit. No need to recount that again, a good account is here.

Image credits: AP

The upshot is that the shares tanked going into the offering and it appeared certain that it was going to fail because shares were trading well below the offering range. And then the strangest thing happened. As time got short, all the shares were mopped up, despite the shares trading well below the offer price. It appears (and we will know more in a few days) that large sovereign investors, but more importantly, other family-controlled conglomerates swooped in to buy shares well above the market. It is the case that Adani had previously announced that they'd offer a 10% discount for large buyers, but even that wouldn't close the gap.

So, what transpired? It appears that in an oligopolistic, highly concentrated, and still constrained market (particularly for global investors) that strategic considerations (influence and cooperation amongst the largest enterprises) expressed themselves in a ways the public prices didn't capture.

That is why, regardless of the integrity of Hindenburg's thesis, investors--long or short--should be wary about speculative trades in India. They just might blow up! (Although the short stills looks good on paper.)