VIL has not revealed any granular details of the use of funds or which of its subsidiaries will be lending, the nature of the loan instruments, their tenure or even the interest cost for these loans. The loans, revealed for the first time in VIL’s June quarter results released on October 3, is set to keep the spotlight on VRL’s corporate governance practices especially the use of inter-corporate loans from listed subsidiaries by the parent.
Till press time on Tuesday, Vedanta had not responded to ET’s detailed questionnaire sent on Monday evening.
VRL has standalone debt of $7.3 billion as of FY20 of which a term loan of $ 1.9 billion is due by September 2022. These can be serviced through cash flows from the underlying subsidiaries. The consolidated group debt is around $15 billion against as EBITDA of $2. 6 billion.
VRL’s attempt to take VIL private failed last week after the reverse book building offer did not receive the required number of shares from investors. VRL withdrew the offer on Saturday.
The failure of the delisting plans increases the focus on capital allocation in the Vedanta group. Analysts are questioning the corporate logic of upstreaming the cash as inter corporate loans from a listed VIL to the parent when it has debt of Rs 58,600 crore of its own.
“An increase in intercompany loans could be negative for minority shareholders, while a high dividend pay-out would be perceived positively… We believe discussions on capital allocation will dominate investor concern instead of operational performance,” said Indrajit Gupta, analyst CLSA.
Vedanta passed a special resolution in FY17 to increase the limit of inter-company loans from Rs 60,000 crore to Rs 80,000 crore. Limit to inter-company loans as per Section 186 of the Companies Act is up-to 60% of share capital and free reserves, which is about Rs 19,000 crore.
VIL and its subsidiaries have around Rs 33,781 crore cash and cash equivalent versus a gross debt of Rs 58,568 crore as on June 30, 2020. Hindustan Zinc India alone has Rs 15,511 crore surplus cash while Cairn India has Rs 4,020 crore net cash. The government owns 29.5% of HZL.
The dividend payout of Rs 4,500 crore that VIL received from Hindustan Zinc in May is yet to be passed on to shareholders despite a dividend distribution policy in place. VIL in its annual report cited “the need for financial flexibility at the group” as the reason for holding back the dividend. It owns almost 65% in Hindustan Zinc.
“Management’s ability to restore minority shareholders’ confidence is key to retaining / re-rating trading multiples,” argued Ritesh Shah, analyst with Investec. “We find failed delisting is an additional scar, in addition to recurring corporate governance issues including the recent $1.05 billion loan with limited disclosures,”
Inter-corporate lending has faced severe investor backlash in the past.
In December 2018, Cairn, an arm of Vedanta, committed to pay $500 million in a structured instrument to own a 1.8% economic interest in Anglo American PLc, a company Agarwal was pursuing to acquire then. However, the ownership and voting rights of these shares remained with Agarwal’s private investment vehicle Volcan.
In 2014, a similar loan of $ 1.25 billion was given to the promoter group, which was used by Vedanta to repay another inter-company loan taken for acquisition of the oil company. The move had spooked investors then raising several questions about related party transactions. Vedanta later rolled over that loan. In 2016, Agarwal merged Cairn India with Vedanta mainly to use the Rs 23,290-crore cash lying with Cairn to partially pay off Vedanta’s debt. The deal was sweetened after a widespread protest by minority shareholders including LIC.
Even during the recent delisting exercise, the company Vedanta Ltd (VIL) wrote off Rs 17,000 crore as impairment cost after commodity prices softened during the pandemic and reduced its book value from Rs 146.87 per share to Rs 89.38 per share – a move that was also criticised.
In these cases, the role of independent directors is important and they have to act as a watchdog, said corporate governance experts.
“Minority shareholders expect that independent directors exercise vigilance on matters like intercompany loans or related party transactions which always has some kind of conflict of interest by the promoters,” said Shriram Subramanian, managing director, InGovern Research Services.
Independent directors in the Vedanta board includes former Sebi chairman UK Sinha, former HSBC Asia Pacific CEO Aman Mehta, K. Venkataraman, former CEO of L&T, Tata Motors veteran Ravi Kant and Lalita Gupte, former joint MD, ICICI Bank.