How Vedanta Has Short-changed Its Shareholders by Getting Dividend from HZL but Not Passing It On
Moneylife Digital Team 06 October 2020
Independent corporate governance research and proxy advisory firm Stakeholders Empowerment Services (SES) has released a detailed note which explains how Hindustan Zinc Ltd (HZL) has not paid dividend to Vedanta shareholders in violation of its own dividend distribution policies (DDP). 
 
In May 2020, HZL announced a dividend of Rs16.50 per share aggregating to Rs6,972 crore for FY19-20. Mumbai-based Vedanta Ltd is a 64.92% shareholder in HZL and, hence, received bulk of the sum amounting to Rs4,526 crore. This amounts to Rs12.18 for every share of Vedanta. 
 
However, Vedanta has made an inexplicable departure from the past and is yet to distribute it to shareholders of Vedanta, in accordance with its DDP. In its annual report, Vedanta has quoted “the need for financial flexibility at the group” as the reason for holding back the dividend. Vedanta Ltd has, for the first time in at least five financial years, not passed on the ‘normal’ dividend to its shareholders which it received from HZL. 
 
 
As per the DDP of Vedanta, all dividend (other than special) received from HZL shall be passed on to Vedanta shareholders in entirety.
 
The SES note contends “Vedanta should have ideally declared dividend upon receipt of dividend from HZL (as it is a ‘Normal Dividend’, and not a ‘Special Dividend’.”
 
As per Rule 43A(1) of Securities and Exchange Board of India  (SEBI)‘s (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR), all the top-500 listed entities based on market capitalisation are required to formulate a dividend distribution policy which needs to be disclosed in their annual reports/website.  In case the listed entity proposes to change the dividend distribution policy, it needs to disclose such changes along with its rationale in its annual report/website.
 
DDP of Vedanta:
 
 
The DDP of Vedanta thus makes it clear that Vedanta board does not have any discretion in not paying ‘normal’ dividend it receives from HZL. 
 
Vedanta in its latest annual report has provided the following reason for not declaring final dividend for FY19-20 (i.e., after receipt of dividend from HZL for FY19-20): “Given the current market dislocation and uncertainties caused by the coronavirus pandemic, it is important to maximise financial flexibility across the group. Your board will decide on the size and timing of any future dividend payments once there is greater clarity on the outlook for the economy and commodity markets. Your Company believes this is the correct decision for all the stakeholders as we navigate through an unprecedented period of volatility for the global economy and our business. The Directors do not recommend final dividend for the financial year ended 31 March 2020.”
 
Dividend Distribution History of Vedanta
 
 
The note further observes that Vedanta has a settled practice of passing normal dividend received from HZL almost immediately to its shareholders. 
 
Corporate governance experts had earlier pointed out that by holding back the dividend to Vedanta’s shareholders, despite having a DDP, could indirectly lead to a reduction in the company’s delisting price. They had also hinted that if the dividend was not paid now, then it would never happen if the delisting goes through.
 
This is, indeed, baffling when there is an ex-SEBI chairman (UK Sinha) sitting as an independent director on the board of Vedanta Ltd.
 
The SES note has asked some hard-hitting questions: “Can the Vedanta board decide dividend payout across the group when the financial position of the companies differs and also its shareholders are different across group entities? Given that voluntary delisting is pending, the board helped the promoter to effectively reduce delisting price by the amount of HZL dividend not paid and indirectly adding an additional Rs 2,250 crore to promoters’ kitty.” 
 
SES has asked “Was the dividend by HZL paid only to shore up cash in Vedanta?” SES said assuming that Vedanta gets delisted this year, the entire dividend of Rs4,500 crore will be taken by the promoters, when approximately Rs2,250 crore was to be passed on to the public shareholders of Vedanta.
 
As per a SEBI circular dated 22 January 2020, 
 
"The recognized stock exchanges shall take action for non-compliance with the provisions of the Listing Regulations & circulars/guidelines issued thereunder, by a listed entity as under: 
 
Regulation 43A: Non-disclosure of Dividend Distribution Policy in the Annual Report and on the websites of the entity. 
Fine payable and/or other action to be taken for non-compliance in respect of listed entity: Rs25,000 per instance 
 
While the SEBI has specified penalties for non-disclosure of DDP, there is however no such action specified in Regulation 43A or aforesaid Circular, in case where dividend declared / paid or not, is as per the disclosed DDP of a Company.
 
Delving into whether the DDP is a promise to the shareholders, the note adds “Corporate structure, with diversified ownership, does not create a one to one contract between shareholders and company. Yet management and operations and governance of all companies is based on various laws, which can be said to reflect some sort of deemed contract between shareholders and company. In opinion of SES, DDP constitutes or implies a promise to shareholders. The SEBI LODR uses the phrase “the circumstances under which the shareholders of the listed entities may or may not expect dividend”. Therefore, DDP creates an expectation and an indirect promise to pay to shareholders.
 
SES has opined that if any Company does not abide by its DDP, it is in breach of a promise and the doctrine of promissory estoppel applies. The note suggests that SEBI must consider amending its laws relating to DDP to make DDP more objective. 
 
SES has added its opinion that “Action of the Company viz. Vedanta, is not in the interest of shareholders of Vedanta, SEBI can suo motu act in the larger interest of shareholders and ensure that shareholders are paid dividend of Rs12.18/ share as soon as possible by Vedanta.”
 
Recently, HZL issued non-convertible debentures (NCDs) and raised Rs3,250 crore. There is no sign of any sudden slump in the business of HZL. SES is of the opinion that the shareholders must seek answers from the company regarding the sudden issuance of NCDs.
 
The SES note probed "HZL being a cash surplus company which pays hefty dividends to its shareholders, SES is unable to understand that why suddenly such significant amount of money is being raised through borrowings.”
 
In fact, only in May 2020, HZL had paid an interim dividend to its shareholders amounting to close to Rs7,000 crore. The SES note says "Therefore, SES is unable to comprehend that if the Company did require funds, then why did it declare Rs7,000 crore of dividend in May. Either it is a case of absolute absurdity in financial management or is there a plan which shareholders are unaware?”
 
Yesterday, we had written an article to sum up SES’s detailed research report about the fair price for Vedanta’s delisting.
 
Bidding for the reverse book building (RBB) process kick-started yesterday and will continue till 9th October. 
 
The bidding details can be viewed at this link.
Comments
mohnotg1
1 year ago
The way investment in Anglo American was funded itself indicated that the promoters clearly disregarded minority shareholders. That raised serious red flags.
komalhema4
1 year ago
Unscrupulous businessmen , instead of manufacturing and making profits do shortcut methods of making money by putting hands to pull money from shareholders' pockets nothing short of pickpocketing.
Years ago a well known steel company issud IPO at 70 Rs ,company showed losses -may be fraud accounting.The share price went down to Rs 32 and they delisted and compulsorily bought back all shares at this price,causing huge losses to many shareholders.
rihanahmad
1 year ago
It is payday time for Mr Agarwal ...time to call in the favours(contributions) that he has paid to BJP party for many many years . and surely they are obliging . Govt nominee in BOD of Hindustan Zinc , and still he acquieses to BOD resolution that company needs to raise money , when hind zinc is already so cash rich and additional fund raising cannot be justified . The govt is very obliging . Can u not see ? pity the blind . Further , messages will go to institutional shareholders to tender their Vedanta shares at lower price than their worth , just to help the promoter delist . It is all for the party - let the tax payers get screwed . This is a banana republic bro . Jai Hind .
bhaskar.jain
Replied to rihanahmad comment 1 year ago
If its banana republic, why don't you move somewhere else?
kpushkar
1 year ago
Sebi remains incompetent body , white eleohant with no
accountability..
Uk sinha seems another rubber stamp . What can we expect from sarkari babu living on crumbs
komalhema4
1 year ago
They have been cheating shareholders in the past also.Some companies do unfair trade practices through all loopholes in companies act,without any moral principles or consciousness. Hook or crook make money.Hoodlums tie a kerchief around the neck.Corporate hoodlums wear a cloth a little long cloth called tie.Surprisingly SBI does not put an end to such malpractices,
Newme
1 year ago
Delisting of Vedanta on its low price point is another cheap tactics by Agarwal.
Newme
1 year ago
As usual SEBI and Company Affairs Ministry is found wanting in discharging their roles.
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