Anil Agarwal-led Vedanta Group has once again landed in controversy. US-based short-selling firm Viceroy Research has accused Vedanta’s subsidiary Hindustan Zinc Ltd of entering into a brand fee agreement without government’s approval in a series of reports published recently.

The allegation not only raises serious questions on the governance of the company but may also lead to the breach of the shareholder agreement with the Government of India, pushing Hindustan Zinc into a default situation.

Viceroy Research report on Vedanta

According to a report by Viceroy Research, in October 2022, Vedanta had imposed ‘brand fees’ on Hindustan Zinc, the validity of which is now being questioned. The report claims that prior approval of the central government was not taken for this agreement, which is a violation of the shareholder agreement signed in 2002.

This agreement was made when Vedanta bought stake in Hindustan Zinc from the government. The reports allege that Hindustan Zinc’s brand fee agreement is not only commercially unfair but it may also put the government’s stake at risk.

The Government of India holds 27.92% stake in Hindustan Zinc, while Vedanta holds 61.84% stake.

Brand fee termed ‘uncommercial’

Viceroy has alleged that the brand fee charged by Vedanta is an “uncommercial contract”, which raises questions about transparency within the company. The reports clearly state that such agreements weaken the company’s trust and legal contract with the government. Citing sections 14, 16 and 24, the report said these rules were in direct violation.

These include provisions such as no major decision can be taken without the permission of the government-nominated director, giving guarantee to any other group company is prohibited, and no loan above Rs 20 crore can be given without the knowledge and approval of the government.

What could be the consequences?

If this violation is proven, it could lead to a default. In such a case, Vedanta will have to provide a solution within 15 days. If the company fails to do so, then the government will have the right to take steps under the ‘call option’, such as buying Vedanta’s stake in Hindustan Zinc at a price 25% lower than the market price. Or else Vedanta could be forced to buy the government’s stake at a 25% premium. This option could create financial pressure for Vedanta and distrust in the stock market.

Impact on stock market

The impact of this news was also seen on the stock market. Hindustan Zinc’s stock closed with a slight increase at Rs 436 on BSE. While Vedanta’s stock fell 0.27% to Rs 446.25. However, Hindustan Zinc has not yet issued any official statement on these allegations, which has created more uncertainty among investors.

Vedanta Ponzi Scheme Allegations

Viceroy Research in its reports has compared Vedanta’s operating style to a “Ponzi scheme”. The report says that the company is benefiting other companies of its group through insider financial transactions and guarantees, which is against the interests of public shareholders.

Earlier also, Viceroy Research published several critical reports against Vedanta and its other companies, in which questions were raised regarding capital management, method of debt repayment and corporate governance.

What options does the government have now?

Since the Government of India is a large minority shareholder in Hindustan Zinc, it will not only have to play a monitoring role but can also legally initiate corporate action if the allegations are found to be true. In such a situation, the government can file a complaint with SEBI, review the shareholder agreement and seek clarification from Vedanta.

What does the company say?

After the news reports emerged, Hindustan Zinc or Vedanta Group is yet to release an official statement on the matter. The company’s silence has left investors concerned. The incident has once again underlined the importance of corporate governance, transparency and government oversight.

If Viceroy Research’s allegations prove to be true, Vedanta will have to make strategic changes at its group level. Also, the government will have to keep strict vigil in such disinvestment deals in future, so that the interests of public assets can be protected.

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