US-Based Short Seller Viceroy Research on Vedanta and Hindustan Zinc - Both in Reds: Here Are the Details

Vedanta Limited (VEDL) and Hindustan Zinc (HZL) stocks have recently plunged by 4.1% and 4.85% respectively, following the release of a detailed forensic report by Viceroy Research that has raised serious concerns about the group’s financial health. The report accuses Vedanta Resources Limited (VRL), the parent holding company, of systematically draining its listed subsidiary, VEDL, calling it a “parasite” feeding on the “host” company in a financially unsustainable and operationally compromised structure.

According to the report, VRL depends entirely on extracting cash from the Vedanta Group to survive. It describes the overall structure as a “financial zombie” kept alive by cash transfusions from VEDL, pushing the entire group into a “self-destructive feedback loop” that has brought it to the edge of insolvency.

One of the main concerns raised is the use of unsustainable dividends. VEDL's dividend policy, the report claims, is not driven by actual earnings or free cash flow, but rather by the need to service VRL’s mounting debt. This has led to a distorted valuation of VEDL’s stock, with the report warning that a significant dividend cut is inevitable for the company’s survival. Another major issue is the extraction of artificial brand fees by VRL, which amount to hundreds of millions of dollars annually. These fees are charged to VEDL and its subsidiaries, including HZL, without any commercial justification, even though many of these companies do not actively use the Vedanta brand.

The report also reveals that VRL took loans from VEDL’s subsidiaries to buy back shares of VEDL itself, with over $122 million of a $956 million loan written off without repayment. This is described as a clear violation of the Companies Act. In addition, there are several allegations of financial manipulation, including irreconcilable interest expenses, with VRL’s reported interest rate at 15.8% despite its bonds carrying lower rates, suggesting the presence of hidden off-balance sheet debt. The report also points to inflated asset values and capital expenditure fraud, where regular expenses are capitalized to artificially boost profits and use those inflated figures to borrow more money. An example cited is ESL Steel, where environmental penalty funds were improperly recorded as assets.

Hindustan Zinc, a key part of VEDL’s portfolio, faces its own set of risks. The report says that VEDL has triggered an "Event of Default" with the Government of India (GoI) by failing to build a required smelter. This gives the GoI the right to either buy VEDL’s entire stake in HZL at a 50% discount or force VEDL to buy the government’s 29.54% stake at a 50% premium—both scenarios represent a potential loss of over $10 billion. These risks, the report adds, were not disclosed in VEDL’s FY25 filings. On top of that, HZL is also under criminal investigation by the CBI over the original disinvestment deal from 2002, and is reportedly being “looted” through related-party transactions and unjustified brand fees, harming minority shareholders, including the government.

The report further highlights major governance lapses. Since the announcement of the demerger in September 2023, there has been an exodus of senior management, suggesting internal disagreements and a weak outlook. It also accuses Vedanta of “audit arbitrage,” appointing compromised auditors across its entities to avoid proper scrutiny. Many of these auditors have been linked to scandals or faced regulatory action in the past.

In conclusion, the Viceroy report paints a grim picture of the Vedanta Group, describing it as a “house of cards” built on unsustainable debt, manipulated assets, and questionable accounting. The proposed demerger is seen not as a solution, but as a tactic to spread financial risk across more fragile companies. For investors, the recent stock declines in VEDL and HZL reflect the serious risks highlighted in the report. The situation demands urgent attention and caution.

Disclaimer: The article is for informational purposes only and not investment advice.