Vedanta’s failed delisting puts investors at risk of cash flow leakages: IIAS

The failure of India’s largest ever delisting exercise has put both promoters and the stakeholders in a difficult spot. The shareholders of Vedanta Ltd will now have to bear the burnt of cash flow leakages at the cost of their returns and dividends, while the promoters’ cashflow to support the group debt has been curtailed, Institutional Investor Advisory Services (IIAS), a proxy advisory firm in a report on Thursday.

On 9 October, Vedanta Resources’ bid to delist its Indian subsidiary Vedanta Ltd was rendered unsuccessful as it fell 7% short of the 1.34 billion shares needed. The determining factor were 12.3 crore unconfirmed bids.

Vedanta will also return the tendered shares to the investors, as the company's plan to go private was scuppered, throwing the spotlight on its debt. Any future attempt at delisting now stands pushed by at least a couple of months.

The minority investors including institutional investors were keen on the delisting and were hoping to get a price for their shares in the range of ₹150 - ₹320 apiece. Domestic institutional investors, make up a nearly half of Vedanta’s public shareholding at 49.49%. The biggest institutional shareholders of Vedanta include ICICI Prudential Mutual Fund (4.81%), HDFC Trustee Co. Ltd (3%), SBI Mutual Fund (1.16%) and Life Insurance Corp. of India (6.37%).

The Vedanta group is highly leveraged with cumulative debt standing at ₹1.11 trillion as of March 2020. Almost half of this debt resides with the holding company Vedanta Resources Ltd. The debt raised for delisting of Vedanta Ltd at $ 2.5 billion only aggravated its debt position.

According to Bloomberg, Vedanta will return this money to lenders borrowed at 13% by third week of October

“Since the holdco has no meaningful standalone operations, for the debt to be repaid, it will need access to the cash flows of its operating subsidiaries – Vedanta ltd and it 64.92% subsidiary, Hindustan Zinc Limited (HZL),” said IIAS.

“Vedanta’s shareholders must expect increasing cash outflow to the parent company at their expense,” it added.

IIAS cited examples of Vedanta deviating from its dividend distribution policy and not paying out the ₹45 billion of interim dividend (for FY20) it received from HZL to its shareholders. Instead it used part of the money to grant a loan to the holding company through foreign subsidiaries.

“Vedanta has been using the regulatory loopholes to support the holdco debt. In giving loans through subsidiaries, it is avoiding the need for shareholder approval: the loans are related party transactions and would require the approval of majority of minority shareholders. Even so, giving these loans through subsidiaries needs the shareholder approval of the parent company (VEDL in this case), and the board’s acquiescence,” said IIAS.

It further said that the independent directors and board of Vedanta are doing a disservice to minority investors by allowing cash flow support to the group.

“In bypassing the need for shareholder approval, they are doing a disservice to minority shareholders and themselves,” the proxy advisory firm added.