Vedanta Delisting Is Opportunistic And A Litmus Test For The Board, Say Governance Firms

On May 18, Vedanta Ltd.’s board of directors will meet to consider the delisting proposal by promoter Vedanta Resources Ltd.

Anil Agarwal, billionaire and chairman of Vedanta Group. (Photographer: Simon Dawson/Bloomberg)
Anil Agarwal, billionaire and chairman of Vedanta Group. (Photographer: Simon Dawson/Bloomberg)

On Monday, May 18, Vedanta Ltd.’s board of directors will meet to consider the delisting proposal by promoter Vedanta Resources Ltd. Here’s a message to them from two governance advisory firms — act in the interest of minority shareholders.

Vedanta’s independent directors have a fiduciary duty to guide shareholders on VRL’s delisting bid, said an Institutional Investor Advisory Services report. It describes the offer price of Rs 87.50 per share — less than half the 52-week high of Rs 180 and just above the 52-week low of Rs 60 — as “opportunistic”.

While the offer price represented a 10 percent premium over the then market price, it “does not reflect intent, seriousness and fairness,” said Stakeholders Empowerment Services, another governance advisory firm, in its report. SES pointed to Vedanta subsidiary Hindustan Zinc Ltd. and said “the value embedded in each share of Vedanta due to HZL itself is almost 150 percent of price offered”.

Minority Protection In Place

VRL has explained its delisting offer as an extension of its efforts to “simplify” the group structure. But it also acknowledges the slide in share price.

The proposed delisting offer will provide public shareholders of Vedanta Ltd. an opportunity to realise immediate and certain value for their shares at a time of elevated market volatility.
Vedanta Resources Statement

To be clear, VRL’s offer price is not the final price.

Delisting regulations laid down by the securities market regulator include two safeguards to protect minority shareholders. The delisting proposal needs approval not just from the company’s board but also from shareholders via a special resolution — needing 75 percent votes in favour. Also, the delisting price is determined by reverse bookbuilding in which shareholders bid at which price they’d be willing to sell their shares. The discovered price is the one at which the acquirer can take its shareholding to at least 90 percent. It can also withdraw the delisting offer if the discovered price is not acceptable.

Simply put, it is public shareholders, who own 49.5 percent of the company, that will decide if the delisting goes through or not.

But that’s no reason for independent directors to shrug their shoulders and take cover under regulation, said IIAS.

Vedanta’s independent directors, at the May 18, 2020 board meeting, must articulate whether shareholders must vote in support of the delisting, and indicate a price range that they believe reflects the intrinsic value of the stock.
IIAS Report

IIAS has cited the instance of the London delisting of Essar Energy where a five-member independent board committee rejected the promoter offer on grounds that it “clearly undervalued the company and its long-term growth prospects”.

That was in a different jurisdiction. In India there is no such obligation on independent directors. Unlike SEBI’s takeover regulations that require a committee of independent directors “ to provide reasoned recommendations” on an acquisition offer, the delisting regulations say that a company’s board while approving the proposal for delisting shall certify that “the delisting is in the interest of the shareholders”. That’s broad approval, not specific commentary on price.

Besides, at a time of such widespread uncertainty, any price commentary would be extremely challenging. Even a low price may look good if stock markets decline further.

Vedanta’s Debt Woes

The delisting, if it were to happen at this price, would cost VRL just over Rs 16,200 crore, at a time low oil and metal prices have already cast a shadow over the Vedanta Group’s fortunes.

In March, VRL’s corporate family rating was downgraded by S&P and then put on review for a further downgrade — all in the span of one month. The holding company has $3 billion in debt and other payments coming up by September 2021.

IIAS has argued that the delisting is driven by high group debt and an effort to enhance cash flow. “Vedanta Ltd., on Dec. 31, 2019, reported cash balance of about $4.7 billon. By owning 100 percent of Vedanta (from the current 50.14 percent), VRL’s consolidated Ebidta will likely double,” the report said.

The same has been acknowledged by S&P Global ratings in a statement this week.

Vedanta Resources’ inefficient corporate structure and dependence on dividends from Vedanta Ltd. for debt servicing have constrained its credit profile. A successful privatisation of Vedanta Ltd. would improve Vedanta Resources’ access to the subsidiary’s cash flows.
S&P Global Ratings Statement

Which is why IIAS expects that VRL will “ shell out significantly more” for a successful delisting.

An email to Vedanta Group seeking comment on the IIAS and SES reports has yet to be answered.

Board Decision

The Securities and Exchange Board of India’s delisting regulation does not dwell upon the motive for delisting, though it does prohibit promoters from using the company’s funds to finance the exit.

The delisting proposal will be scrutinised by Vedanta’s board on Monday. What makes the proceedings more interesting is the presence of a former regulator on the board. The 10-member board has five independent directors. Among them, UK Sinha, former chairman of SEBI, veteran bankers Lalita Gupte and Aman Mehta, former HUL Vice Chairman MK Sharma and former L&T Managing Director K Venkatramanan.

“It is a great opportunity and right occasion for the board to live up to its duty and act in the interest of investors,” SES said.

In pandemic times, that’s going to be a tough call.

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