Short-seller flags Hindustan Zinc ₹1.5K cr 'brand fee' payment to Vedanta

The allegations place the next move squarely in the government's court, raising questions around Vedanta's compliance with its contractual obligations and governance standards in managing a company

One of the main allegations raised by US short-seller Viceroy Research against Hindustan Zinc (HZL) is around a payment of approximately ₹1,560 crore in “brand and strategic services” fees to its promoter, Vedanta Ltd. The short-seller's report claims this payment lacked commercial justification, despite the presence of government-appointed directors on HZL’s board.

 The allegations also place the next move squarely in the Centre’s court, raising questions around Vedanta’s compliance with its contractual obligations and governance standards in managing a company where the Indian state remains a significant shareholder. 

Viceroy alleged that HZL — India’s largest zinc producer — faces significant legal and financial exposure related to brand fee payments to its promoter and a breach of its agreement with the Indian government. 

 

In a detailed report released on Wednesday, Viceroy claimed that Vedanta Ltd, listed in India, violated its shareholder agreement with the Government by failing to build a contractually mandated smelter. The breach, according to the report, could activate a put/call option clause allowing the government to either compel Vedanta to purchase its 29.54 percent stake in HZL at a 50 percent premium or require the government to acquire Vedanta’s 64.92 percent stake at a 50 percent discount—posing a major financial risk to Vedanta. The report estimated a potential outflow of $10.66 billion if the government enforces the premium buyback clause. 

Responding to the allegations, a Vedanta spokesperson said the shareholders’ agreement between the government and Sterlite Opportunities and Ventures (now part of Vedanta) granted the strategic partner the right to abandon the Kapasan project within one year if deemed economically unviable, based on an independent review. “Following a thorough project evaluation, Hindustan Zinc opted for a more cost-effective brownfield expansion at Chanderiya, which was duly approved by the Board —including government-nominated directors. This was communicated to the Ministry of Mines in 2003 and again in 2005, and no concerns were raised. Since acquisition, HZL’s capacity has grown nearly 5-fold,” the spokesperson said.

 

Viceroy, which disclosed a short position in Vedanta Resources' debt, also flagged over ₹1,560 crore in “brand and strategic services” fees paid by HZL to Vedanta Ltd between the financial year 2023 (FY23) and FY25. A significant portion of these fees, the report alleged, was routed to London based parent Vedanta Resources (VRL), despite the presence of government-appointed directors on HZL’s board and without commercial justification.

 

The report further noted ₹677 crore in advance brand fee payments made in FY24, of which only ₹561 crore was expensed, implying interest-free rolling credit to the parent.

 

“Despite the Government of India’s 29.54 per cent stake and three board nominees, HZL entered into a Brand and Strategic Services (BSS) agreement in October 2022. An independent review is warranted to assess the justifications and board approvals for this agreement,” the report said.

 

Under this arrangement, 2 per cent of projected turnover was paid through a sub-licensing structure managed by Vedanta Ltd, which retained 30 basis points and passed the remainder to VRL. As per the report, HZL paid ₹1,562 crore, equal to 5 per cent of its profits over three years, for a brand it does not use, to a company with an “empty London office.”

In response, the Vedanta spokesperson said Hindustan Zinc pays a board-approved brand and strategic services fee to Vedanta Ltd, which then remits a portion to Vedanta Resources Ltd, the brand license owner. 

 

“These transactions are fully disclosed and comply with applicable accounting and transfer pricing laws. The fees are recorded as expenses in Hindustan Zinc’s books and as income in Vedanta’s. Advance payments are accounted for based on the service period. The suggestion of an 'interest-free loan' is grossly incorrect,” the spokesperson said.

 

Viceroy also alleged that HZL has more than $1.68 billion in undisclosed statutory dues that are not reflected on its balance sheet.

 

Addressing this, the spokesperson said it is misleading to refer to these as “undisputed statutory” claims, as they are actually disputed claims disclosed in the CARO (Companies Auditor’s Report Order) report.

 

“The company assesses its disputed liabilities as Possible, Probable, or Remote, in line with accounting standards, and reports 'Possible' obligations as contingent liabilities, which are duly audited,” the spokesperson said. 

Vedanta Base Metals CEO quits

 

Vedanta Resources, the mining conglomerate owned by billionaire Anil Agarwal, has lost the top executive of its base-metals business, according to sources. Chris Griffith, who joined Vedanta in 2023, left the mining firm recently, the sources said, asking not to be identified because the matter is private. Aside from being in charge of some of its key assets like zinc mines in South Africa and Namibia, he was also the president of the firm’s international business. A Vedanta spokesperson also confirmed the resignation adding that the executive had expressed his plan to leave “a while back.” On Wednesday, Viceroy Research released a report saying it was shorting the debt held by Vedanta Resources. (Bloomberg)