NCLT rejects Talwandi Sabo power unit's scheme in Vedanta demerger

The National Company Law Tribunal dismissed the demerger scheme filed by Talwandi Sabo Power Ltd (TSPL) at an initial state in a setback for the five-way spinoff of its parent Vedanta Ltd.

The tribunal’s Mumbai bench, comprising judicial member Reeta Kohli and technical member Madhu Sinha, on Tuesday ruled that TSPL’s proposed demerger scheme of arrangement lacked the necessary disclosures, specifically regarding the company’s debt obligations.

SEPCO Electric Power Construction Corporation (Sepco), a creditor of TSPL, had raised objection to the scheme, claiming that the power unit had deliberately excluded their outstanding debt of ₹1,251 crore from the list of creditors. The tribunal deemed non-compliant with legal requirements.

Failure to comply with disclosure laws

In its order, the Tribunal emphasized the importance of full disclosure under Section 230(2)(a) of the Companies Act, 2013. "SEPCO has brought to our attention that material information with respect to its pending dues, which was duly reflected in the balance sheets of TPSL since 2019 until the approval of the Scheme by the directors, have been altered to the prejudice of SEPCO," said the bench.

Read more: Breaking up to grow: Vedanta’s demerger and its impact on investors

The tribunal said that the omission of Sepco's debt, which amounted to more than 75% of TSPL’s unsecured debt, undermined the entire process.

Sepco, represented by law firm Cyril Amarchand Mangaldas, asserted that its debt was deliberately omitted from TSPL's list of creditors. This omission, it said, prevents creditors and shareholders from making informed decisions regarding the scheme.

"[If] the debt due to SEPCO was considered, the valuation would have been greatly impacted rather the same could have led to negative net worth post the demerger", Sepco said.

Hemant Sethi & Co, appearing for TSPL, opposed the intervention at this stage, arguing that the court’s role is limited during the first motion and that Sepco should only be allowed to intervene when the scheme is being approved, as the meetings for shareholders and creditors have not taken place yet.

The tribunal, however, was not persuaded, emphasizing that TSPL had recognized Sepco's debt in their financial statements for years, including in their balance sheets for FY23.

The NCLT noted that TSPL is aware of its large liability to Sepco and must inform shareholders and creditors about this, even if the liability is uncertain. "The concealment of this fact on the part of the TSPL is a matter of grave concern for the tribunal," NCLT held, while rejecting the scheme.

A Vedanta spokesperson said, “TSPL has been advised that there are legal grounds to appeal the relevant order and proposes to [do so] at the earliest opportunity. Vedanta Limited/TSPL is committed to honouring the letter and spirit of the law, and is confident of pursuing its demerger scheme of arrangement through to its logical conclusion.”

Read more: For Vedanta, dividends and demerger delays play spoilsport