Govt silence on Vedanta's Kapasan project raises eyebrows

Analysts see breach of agreement in HZL's failure to provide expert view on shelving the project

In 2002, when the government divested its stake in Hindustan Zinc Ltd (HZL) to Vedanta Resources, it had asked the latter to look at setting up a zinc smelter at Kapasan in Rajasthan. The shareholding agreement clearly stated failure to do so would require HZL to pay 150 per cent of the market value of outstanding government shares. Alternatively, HZL would have to sell its shares to the government at 50 per cent of the market value.

Vedanta acknowledged it in its filing with the US regulator, Securities and Exchange Commission, on May 29: “The government of India may allege a breach of a covenant and seek to exercise a put or call right with respect to shares of HZL, which may result in substantial litigation and serious financial harm to the Sesa Sterlite Group’s business, results of operations, financial condition and prospects,” it said.

The government holds 29.5 per cent stake in HZL and earlier this year, Vedanta offered to pay Rs 15,000 crore for the stake. The company has now asked for a shareholders’ nod to negotiate with the government. The company has further stated the shareholders nod will give it a free hand to increase the offer price by 15 per cent. If the negotiations go over 15 per cent of the current offer, Vedanta will have to come back to shareholders for a fresh approval.

PROJECT IN TROUBLE

• According to the deal, Vedanta was to look at setting up a zinc smelter at Kapasan, Rajasthan 
• It later told the govt, it would not take up the project 
• There had been no talk in the government about the breach of the shareholders agreement regarding the Kapasan project

At the 15 per cent higher offer, the value of the shares that the government holds on Monday in HZL, at 150 per cent, comes close to Rs 27,500 crore, much higher than the Vedanta offer.

Sterlite Opportunities and Ventures Ltd is the holding company through which Vedanta’s India subsidiary, Sterlite Industries, holds majority stake in HZL. Vedanta is now in the process of merging its two biggest companies, Sesa Goa and Sterlite Industries, to make Sesa-Sterlite, the world’s seventh largest resource company.

The Kapasan agreement stated that if within a year of April 11, 2002, HZL found that the project was not feasible, the company had the full right to discard the project after informing the government. HZL needed a proper feasibility study, report of an independent expert and the board’s approval to decline the project.

On April 4, 2003, a week before the deadline, HZL told the government the Kapasan project would not be taken up as the 170,000-tonne brownfield zinc smelter in Chanderiya, Rajasthan, which was approved by the board of HZL and informed the government just a day before (April 3, 2003), would be at a significant cost advantage to the Kapasan project. The company further told the government the report of an independent expert, hence, was not required.

Replying to a query from Business Standard, HZL said it had duly informed the coal and mines ministry in early 2003 it was setting up the Chanderiya project, which is more economical than the 100,000-million-tonne-per-annum (mtpa) expansion at Kapasan, and therefore it would not be setting up the Kapasan project.

An official from the ministry of mines also told Business Standard the government and HZL were in arbitration over the stake sale, but there had been no talk in the government regarding the breach of this shareholders agreement regarding the Kapasan project. He didn’t specify any reason.

But Ravindra Deshpande, metals analyst at Elara Securities, said this was clearly a breach of contract as the company failed to get an independent expert’s opinion on the project. For reasons unknown, the government hasn’t pulled up the company for this since 2005.

HZL, in its reply, said: “Being a large project, such matters are thoroughly discussed and evaluated by the management and taken through a process of the board approval. The successful track record of growth at HZL is a testimony of the sound process of evaluation and approval.”

In a letter dated November 10, 2005, the government had asked HZL to provide it with minutes of the meeting of the HZL board related to the Kapasan project and a copy of the report of the independent expert. The demand was repeated on December 1, 2005.

In its reply on December 7, 2005, HZL provided the extracts of the minutes of the board meetings and admitted it did not get an independent expert to study the project, thus breaching the shareholders agreements.