Vedanta can get over Rs 6,500 crore after HZL reserve transfer nod

In what could lead to increased flexibility in paying higher dividends, Hindustan Zinc‘s scheme of arrangement with shareholders to transfer ₹10,383 crore of general reserve to retained earnings has been approved by the National Company Law Tribunal.

This will help Vedanta upstream dividend from its subsidiary Hindustan Zinc to repay debt at the holding company level. Post this approval, Vedanta Resources’ $894 million 13.875% bond saw an improvement of 50 basis points and was trading at 14.4% against 14.9% on Tuesday.

Vedanta Limited, which holds a 64.92% stake in Hindustan Zinc, could see an increase in dividend payout. Also, the government which holds 29.54%, with the remaining 6% owned by the public will benefit from the move.

Of the ₹10,383 crore, more than ₹6,500 crore could be transferred to Vedanta Limited, which could be subsequently paid to its UK-based parent company, Vedanta Resources, if the entity decides to use it for dividends.

This move could help Vedanta Resources, which is looking to bring down debt by another $3 billion by FY27 from net debt of $6.2 billion as of March 2024.

“It is clarified that transfer of amounts standing to the credit of General Reserves to the Retained Earnings of the Company, should not entail or be deemed as any obligation on the Company for declaration or distribution of any dividend,” the order said.

The Jaipur bench of NCLT, pronounced the order on July 16 by Technical Member Rajeev Mehrotra, which allowed funds to be reclassified and transferred to retained earnings from the general reserves as of the appointed date.

With this scheme, Vedanta is looking at utilising excess reserves to create shareholder value, the company argued, citing its sound cash flow generation and business growth trajectory.

“Now, with the transfer of general reserves to retained earnings at subsidiary Hindustan Zinc allowed, Vedanta group has alternate options to meet its debt obligations,” said a bond investor.

PROPOSAL FACED OBJECTIONS

The scheme, which was filed with NCLT in September 2022, had faced various objections by stakeholders including NSE and BSE, with them expressing concerns that the scheme might facilitate “routing funds” out of India to benefit Vedanta Resources.

Hindustan Zinc refuted NSE’s concerns, stating that the transfer was solely for internal restructuring and not for immediate distribution to shareholders. The scheme has been approved by the board and shareholders, including government nominees. On routing of funds, it said that the alleged routing of funds is not relevant and is fictitious as the Government of India has three nominee directors on the board and holds 29.54% of the shareholding and the scheme is duly approved by the board.

NCLT in its order rejected these objections as the “scheme of arrangement is a commercial contract between the parties which is binding on all shareholders” and shareholders are the “best judges of their interest.”