Mumbai: India’s government has challenged the merger of Vedanta Resources Plc’s local units in court on grounds that the deal by the flagship company of billionaire Anil Agarwal was aimed at avoiding taxes.
The merger is a device for tax evasion, according to the petition filed by the ministry of corporate affairs citing the income tax department. The ministry has sought the nullification of the amalgamation. The Supreme Court will hear the plea on 17 July.
Sesa Sterlite Ltd, India’s biggest aluminium maker, emerged from the combination of Vedanta’s iron ore mining unit Sesa Goa Ltd and copper producer Sterlite Industries (India) Ltd in an all-share transaction. Investors got three Sesa Goa shares for five shares of Sterlite, while London-based Vedanta transferred to the new entity for $1 its 38.8% holding in Cairn India Ltd, including debt of $5.9 billion.
The move, announced in February 2012, cut the parent’s debt as more than half was transferred to the new entity.
Earnings at Sesa Sterlite mainly come from dividends paid by its oil and gas and zinc units. The company has faced court-ordered curbs on mining and delays in its plans to secure the government’s remaining stake in unit Hindustan Zinc Ltd. Vedanta’s spokesperson Roma Balwani said the company had no comments on the Bloomberg story.
However, an industry executive close to Vedanta, said the Supreme Court case comes on the back of two high court cases last year that were dismissed and a similar outcome could be hoped for from the latest case in the top court.
The merger of the company was carried out last year after the high courts of Goa and Madras dismissed petitions challenging income tax evasion, the executive said.
Two senior analysts had differing views on the Supreme Court case on Vedanta.
“The government is under considerable pressure to garner tax revenues as they have projected a 17% growth in tax revenue," said Dhananjay Sinha, head of research, institutional equity, Emkay Global Financial Services. “There could be a scenario whereby in a case-to-case basis, they might look at other M&As (mergers and acquisitions) also for tax evasion."
Another analyst said the case may not hurt Vedanta.
“This issue has already been considered by high court before…," said Rakesh Arora, managing director and head of research at Macquarie Capital Securities (India) Pvt. Ltd.
“There are operational benefits of merging these entities and I don’t think the Supreme Court will view it any differently."
Shares of Sesa Sterlite fell 1.28% to ₹ 289.90 on BSE, while the exchange’s benchmark Sensex shed 0.07% to 25,006.98 points. Bloomberg
Mint’s Ruchira Singh in Mumbai contributed to this story.