Government Blocks Vedanta HZL Demerger Proposal

The government has rejected Vedanta’s proposal to demerge its subsidiary Hindustan Zinc Limited (HZL) into three separate entities, citing legal and valuation issues. Vedanta had announced its plan to demerge its diversified businesses, including HZL, into six listed companies in September 2023, to unlock value and attract investment. However, the government, which holds a 29.54% stake in HZL, has opposed the move and asked Vedanta to withdraw its application from the National Company Law Tribunal (NCLT).

Why did the government block the demerger?

According to sources, the government has raised several objections to Vedanta’s demerger proposal, such as:

• The demerger would violate the terms of the shareholders’ agreement signed between the government and Vedanta in 2002, when the latter acquired a 51% stake in HZL from the former. The agreement stipulates that any change in the capital structure or shareholding pattern of HZL requires the prior approval of the government.
• The demerger would dilute the government’s stake in HZL and reduce its dividend income. The government received Rs 1,540 crore as dividend from HZL in 2022-23.
• The demerger would create three new entities with different business profiles and risk-return profiles, which would make it difficult for the government to value its stake and exit at a fair price. The government has been seeking to sell its residual stake in HZL for a long time, but has not been able to reach an agreement with Vedanta on the valuation.
• The demerger would not benefit the minority shareholders of HZL, who would receive shares of the new entities without any premium or control premium.

How did Vedanta react to the government’s decision?

Vedanta has expressed its disappointment over the government’s decision and said that it would explore all legal options to pursue its demerger plan. Vedanta said that the demerger was in line with its vision to create world-class sector-leading companies driving the next phase of growth. Vedanta also said that the demerger would benefit all stakeholders, including the government, by enhancing transparency, governance and value creation.

Vedanta had proposed to demerge HZL into three entities: Hindustan Zinc and Lead Limited (HZLL), which would undertake the zinc and lead business; Hindustan Silver Limited (HSL), which would undertake the silver business; and Hindustan Recycling Limited (HRL), which would undertake the recycling business. Vedanta had claimed that the demerger would enable each entity to focus on its core competency, optimize capital allocation, pursue growth opportunities and attract strategic partners.

What is the future of Vedanta’s demerger plan?

The government’s rejection of Vedanta’s demerger proposal has put a spanner in the works of Vedanta’s ambitious restructuring plan, which aimed to simplify its corporate structure and unlock value for its shareholders. Vedanta had planned to demerge its other businesses, such as aluminium, oil and gas, power, steel and ferrous materials, and base metals, into separate listed companies by 2024-25. However, with the uncertainty over HZL’s demerger, Vedanta may have to rethink its strategy and timeline.

The demerger plan was also seen as a precursor to Vedanta’s delisting from the Indian stock exchanges, which it had attempted unsuccessfully in 2020-21. Vedanta had offered Rs 87.5 per share to buy out the public shareholders, but failed to garner enough support. Vedanta had said that it wanted to delist from India to simplify its corporate structure and improve operational efficiency.

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