Vedanta under fire: Allegations of financial misconduct ring alarm ahead of AGM

The firm, which has previously targeted Truecaller and AMD, on Wednesday accused Vedanta Group of alleged financial misconduct and misrepresentation, making empty promises to shore up share prices, manipulating asset values, raising off-balance sheet loans, and corporate governance lapses.

Vedanta Group denied all the allegations, calling Viceroy Research’s report a “malicious combination of selective misinformation and baseless allegations to discredit the Group”.

The timing of the report was suspicious, the conglomerate said, adding that the short-seller’s report could likely undermine forthcoming corporate initiatives.

Mumbai-listed Vedanta Ltd, which is preparing to demerge into five companies, closed 3.38% lower on BSE on Wednesday after crashing nearly 8% intraday, while another group company, Hindustan Zinc Ltd, fell 2.56%.

“We wouldn’t expect much of a (market) reaction initially. It’s going to take people some time to digest,” said Fraser Perring, co-founder of Viceroy Research. 

“There is more to come,” Perring said, speaking with Mint over a call from London, hinting at a series of reports on the conglomerate. He denied Vedanta Group’s allegations around the report’s timing.

In April, Viceroy Research took a short position on the bonds of Vedanta Resources Ltd, the London-based unlisted holding company of the Vedanta Group, Perring said, without disclosing the quantum of his firm’s exposure. The short-seller has no exposure to the publicly traded shares of Vedanta Ltd or Hindustan Zinc, he added.

Viceroy Research’s report harkens back to US short seller Hindenburg Research’s report on the Adani Group, which just 30 months ago wiped out more than half the valuation from India’s fastest-rising conglomerate. 

Vedanta Group said Viceroy Research’s report sensationalised information already in the public domain to profiteer from market reaction. Two analysts, who spoke with Mint on condition of anonymity, said that the report contained “nothing new”.

“All bond holders were privy to this information before investing in the group. They priced in the risk,” one of them said. 

Perring agreed that the report was indeed based on public information. 

“That’s what companies rely on as a defence, because they don’t want to have to explain how bad it is,” he said.

Mint’s additional queries to Vedanta went unanswered.

“This is like what Hindenburg was for Adani. All the information is already known, but it has been compiled and contextualized,” said Shriram Subramanian, managing director of proxy advisory firm InGovern. “Indian investigators will definitely look at this. But I doubt it will trigger a deeper investigation.” 

What are Viceroy Research’s allegations?

The first of the several allegations that Viceroy Research has raised against Vedanta relates to the group’s corporate structure, where significant debt is housed in Vedanta Resources, which has no operating revenue. This, according to the report, is fundamentally unsustainable and leads to a situation where Vedanta Ltd and Hindustan Zinc are forced to declare disproportionately large dividends to service the parent company’s debt.

“This dynamic has created a terminal feedback loop (that puts) VEDL’s capital structure under immense stress before adjusting for any quantitative anomalies,” the research report said.

Cash and equivalents on the books of Vedanta Ltd have more than halved over the past decade to ₹20,749 crore while its long-term debt has nearly doubled to ₹53,284 crore, per data from Bloomberg. 

Another key allegation was that Vedanta Resources’s interest expense was far higher than would be required to service its disclosed debt positions. 

Vedanta Resources reported total interest costs of $835 million for 2024-25 against $4.9 billion of gross debt, implying an effective interest rate of 15.8%, the short-seller said. However, the firm’s publicly issued bonds and disclosed term loans carried rates closer to 9-11%, it added. 

This, Viceroy Research said, was evidence of “hidden debt”. This includes expensive short-term borrowings that are settled just days before the end of each quarter to avoid disclosures. It could also include off-balance sheet borrowings, the short seller alleged. 

Further, Viceroy alleged inflation of value in Vedanta’s assets including Zinc International mines, Fujairah Gold, Talwandi Sabo power plant, Konkola Copper Mines, and ESL Steel. 

“Our forensic investigation into Vedanta’s key operating subsidiaries reveals a portfolio riddled with financially unviable assets, undisclosed liabilities, systematic fraud, and profound governance failures,” read the report. “The book values reported by VEDL are fiction.”

Talwandi Sabo, a captive plant in Punjab, was “virtually worthless,” the short-seller alleged, adding that the power plant holds about $350 million in hidden liabilities against a $400 million balance sheet. This includes a $150 million debt to Chinese construction contractor SEPCO, it said.

Talwandi Sabo supplies all of its power to Punjab State Power Corporation Ltd, which has withheld about $200 million in payments due to disputes. However, the power company records this as revenue despite not receiving the cash, analysts at Viceroy said.

Another such allegedly worthless asset was Konkola Copper Mine in Zambia, according to Viceroy Research. The asset was placed into liquidation in 2019 for consistently making losses. However, Vedanta Resources brought it back onto its books at a “fictitious valuation” of $1.6 billion, as per Viceroy analysts. 

“VRL has made unfunded promises to invest over $1 billion to revive the mine, capital it does not have. Meanwhile, the asset is delinquent on payments to suppliers and losing hundreds of millions of dollars,” they wrote.