Viceroy accuses Vedanta of siphoning funds, inflating assets and deceiving investors

Shares of Anil Agarwal-owned Vedanta Ltd and its subsidiary Hindustan Zinc Ltd fell sharply on Wednesday, 9 July, after United States-based short-seller Viceroy Research published a scathing report alleging deep-rooted financial irregularities and corporate governance lapses across the Vedanta Group.

The development triggered concern among investors, dragging Vedanta’s stocks down by as much as 7.4 per cent in early trade, before it partially recovered to close 4.4 per cent lower, at Rs 436.35. Hindustan Zinc shares ended 2.7 per cent lower, at Rs 424.55.

In its detailed 87-page report, Viceroy Research accused Vedanta Resources Ltd (VRL) — the London-based parent company of Vedanta Ltd — of operating an unsustainable financial structure that is heavily dependent on extracting cash from its listed subsidiaries. Describing the conglomerate as a ‘house of cards’ and a ‘financial zombie’, the report alleges that VRL is engaged in a ‘self-destructive feedback loop’, where aggressive dividend payouts and questionable inter-company transactions are used to service its mounting debt burden.

Among the many allegations levelled, the report claims that Vedanta Ltd has recorded a free cash flow shortfall of USD 5.6 billion against dividend payouts over the past three financial years. Viceroy further contends that Vedanta’s net debt, including working capital items, has grown by USD 6.7 billion since FY22, with the company allegedly exhausting its cash reserves and borrowing capacity.

Viceroy has also taken issue with Vedanta’s interest expense disclosures, stating they vastly exceed reported note rates, and hinted at the possibility of undisclosed, off-balance sheet liabilities.

It accuses the group of artificially inflating profits and asset values by systematically capitalising regular operating expenses. An example cited is the misclassification of environmental penalty payments by ESL Steel as capital assets.

Hindustan Zinc, another major entity in the Vedanta Group’s portfolio, has not been spared either. The report warns of a potential loss exceeding USD 10 billion stemming from an alleged ‘Event of Default’ with the Government of India (GoI), related to unmet commitments around smelter construction.

This situation could compel VEDL either to sell its entire stake in Hindustan Zinc to the government at a 50 per cent discount or be forced to buy off the GoI’s 29.54 per cent holdings at a 50 per cent premium — both options carrying serious financial consequences. Compounding matters, HZL is also reportedly under a Central Bureau of Investigation (CBI) probe over the terms of its original disinvestment deal from 2002.

Another major point of concern flagged by Viceroy is the alleged extraction of unjustified brand fees by VRL from its subsidiaries, including Hindustan Zinc. These charges reportedly run into hundreds of millions of dollars annually and are levied without any commercial rationale, despite many group entities not actively using the Vedanta brand.

The report also raises red flags about related-party transactions and ‘audit arbitrage’, suggesting that several entities within the Vedanta Group have appointed auditors with a history of regulatory scrutiny or weak oversight, thereby weakening checks and balances.

Adding to the broader concerns, Viceroy highlights a steady exodus of senior management since the group announced its demerger plan in September 2023. The move, it argues, is not a strategic restructuring but a method of isolating liabilities and risks by creating five separate entities — each potentially burdened with inherited financial issues.

Responding to the allegations, a Vedanta Group spokesperson dismissed the report as “a malicious combination of selective misinformation and baseless allegations to discredit the Group”.

The company asserted that Viceroy did not contact them before publishing the note and accused the short-seller of attempting to manipulate market sentiment for profit. “It only contains a compilation of various information already in the public domain, but the authors have tried to sensationalise the context,” the spokesperson told CNBC-TV18.

The spokesperson further questioned the timing of the report, suggesting that it may have been released to undermine Vedanta’s ongoing corporate initiatives. “Our stakeholders are discerning enough to understand such tactics,” they added.

Vedanta also noted that the report carries disclaimers, stating that it expresses the authors’ opinions and is for educational purposes only — underscoring the lack of accountability for the claims made.

The developments come at a critical juncture for Vedanta, which is in the midst of a complex demerger aimed at splitting the listed entity into five separate verticals — steel, aluminium, base metals, oil and gas, and power.

The demerger has received a no-objection certificate from the National Stock Exchange (NSE), though the ministry of petroleum has sought more time to file its observations in the ongoing proceedings before the National Company Law Tribunal (NCLT). The matter is expected to come up for hearing again on 20 August.

The management has previously stated its intent to complete the demerger by the end of September, having extended the original deadline from March 2025.

However, with Viceroy’s explosive report casting a long shadow over the group’s finances and operations, questions are now likely to mount over the future of the restructuring and the broader credibility of one of India’s largest mining and resources conglomerates.