Vedanta's structural problems behind its failed delisting attempt

The failed delisting of the mining-to-electricity conglomerate is not the first time attempts to restructure Anil Aggarwal's opaque empire have been controversial

Last week, a plan by Vedanta Ltd, to delist from the two Indian stock exchanges failed when shareholders declined to tender shares citing a low strike price. The failure is a setback for the mining-to-electricity conglomerate owned by London-based billionaire Anil Aggarwal to restructure his group’s businesses. But it is not the first time that attempts to reorganise his opaquely structured empire have met with controversy.

With 49 subsidiaries, 15 of which are direct and remaining step-down entities (see chart), Vedanta is an unwieldy array of businesses with overlapping shareholdings that have often been used by the promoters to rescue one or other of its companies, inevitably leading to shareholder discontent.

Understanding shareholder misgivings about Vedanta requires a brief recap of the group’s business organisation in India. Aggarwal has had operations in India since the 1980s through mining and aluminium company Sterlite Industries, but hit the headlines when he acquired Bharat Aluminium (Balco) and Hindustan Zinc as part of the Vajpayee government’s disinvestment programme in the late nineties.

In 2007, Aggarwal’s London-based Vedanta Resources acquired Goa-based iron ore major Sesa Goa. In 2012, Sterlite and Sesa Goa merged to form Sesa-Sterlite. This renaming was preceded by some complex restructuring. In February 2012, Vedanta Aluminium and Madras Aluminium, both subsidiaries of Vedanta Resources, were consolidated into Sesa-Sterlite. At the same times Vedanta Resources’ direct holding of 38.8 per cent in Cairn India, the Rajasthan-based oil producer it acquired in 2011, was transferred to Sesa-Sterlite together with the associated debt of $5.9 billion. Overall, Sesa-Sterlite came to hold 58.9 per cent holding in Cairn India.

The Indian empire: Vedanta Resources Ltd

(London-based company delisted in 2018; wholly-owned by Aggarwal family’s Volcan investment arm)

Holds 50.1% in Vedanta Ltd  (Formerly Sesa-Sterlite, Anil Aggarwal’s Indian holding company which he planned to delist)

Divisions: Sesa Iron Ore, Sterlite Copper; 600 MW plant in Jharsuguda, Odisha Aluminium; Cairn Oil and Gas

Subsidiaries

• Hindustan Zinc (64.9%)
• Bharat Aluminium Company (51%)
• Talwadi Sabo Power (100%))
• Zinc International (100%)
• Black Mountain Mine: (74%)
• Electrosteels Steel Limited (96%)

(Figures in brackets indicate shareholding)

Source: Annual reports

In 2015, Sesa-Sterlite was renamed Vedanta Ltd, a subsidiary of (then) London-listed Vedanta Resources. A confrontation between shareholders and management started soon after. In 2016, Cairn India and Vedanta Ltd (the Indian subsidiary of Vedanta Resources) announced a merger. Shareholders of Cairn India were to get one equity share of Vedanta Ltd with a face value of Re 1 each. A month later, shareholders red-flagged the fact that Vedanta, with its sprawling portfolio, was gaining access to Cairn India’s cash flows that would help the group cut debt. Vedanta was then forced to revise the offer to include four 7.5 per cent redeemable preference shares per Cairn shareholder for the merger to go through in 2017. 

Another controversial intra-group deal involved Cairn India Holdings, an overseas subsidiary of Vedanta Ltd, and Volcan, the Aggarwal family’s investment arm. In 2018, Cairn India Holdings bought Volcan’s shares in Anglo American, the iconic South African miner that holds mining rights for diamond, copper and platinum mines, for Rs 3,842 crore. This deal was done through a structured investment vehicle known as mandatory exchangeable bonds – that is, bonds that must be converted to shares on a specified date – issued by Volcan and secured by Anglo American shares. Though Vedanta said it made a net gain of about $100 million in the eight months that it held these bonds, Agarwal is believed to have made even more substantial gains by exiting Anglo American in 2019.

In the same year, Volcan also bought out the public holding in Vedanta Resources, which was then delisted from the London Stock Exchange. Significantly, this delisting was announced soon after 13 protestors died in police firing outside Sterlite Copper, Vedanta Ltd’s copper smelting division, in Thoothukudi (formerly Tuticorin), Tamil Nadu, in May of that year (the protests were against alleged violation of pollution norms). Around the same time, the Supreme Court imposed a mining ban in Goa, where the group’s iron ore mines are located.   

Though Agarwal had maintained the Thoothukudi plant incident had nothing to do with the delisting exercise, environmental concerns have put its copper business on the mat for more than two years now. 

After the London company was delisted, Agarwal told Business Standard in a July 2018 interview that, “with increasing maturity of the Indian markets, there is more liquidity which means that the need for a separate London listing is no longer critical.” But this leap of faith in the Indian market was no more visible when Vedanta Ltd announced that it would delist here too.

Agarwal maintained he was simplifying structures, but company insiders admitted the delisting exercise came earlier than expected, primarily because there was no immediate visibility for small investors owing to uncertain economic conditions.

The worry this time, however, was not a group restructuring that moved cash reserves from one company to the other but the delisting price. The company had set Rs 87.25 a share as the floor price based on a book value of Rs 89.38. Proxy advisory firm SES maintained that a Rs 17,400 crore write-off in the quarter ended June 2020 for the Covid-19 impact depressed Vedanta’s book value substantially. Given the fact that oil prices – which would impact returns from the Cairn oilfields – were off their lows, SES argued that neither the book value nor the 52-week low reflected the true value of Vedanta shares.

Institutional investors such as Life Insurance Corporation (LIC), which holds 6.37 per cent, had also asked for a higher exit price – about Rs 320 a share. The promoters could have made a counter-offer within two working days from the discovery of the final exit offer price, which is October 13, 2020, but they had raised $3.15 billion to buy out public shareholders which translated to a maximum offer price of only Rs 130-150.

The failure to get past this latest challenge is likely to be temporary since the group has always depended on acquisitions and restructuring to proliferate but this time it will have to contend with greater shareholder and regulatory oversight.