What ‘Vedanta should learn from ‘Tata

The share price of Vedanta Limited went down by 20 per cent in today’s trade. The reason for such a fall is its promoter’s plan to delist the company, which has gone haywire. Looking at the current schemes of things, the promoter has to shelve the plan of delisting for as of now. Besides, it also shows how a handful of market participants may destroy the equity culture that has been built by different stakeholders, including promoters, media, and investors.

The story so far

Vedanta is a natural resource company and was once considered India’s answer to Rio Tinto’s and BHP Billiton of the world.  The company is engaged in the business of manufacturing copper & copper products as well as aluminum and aluminum products. It is also engaged in the generation & sale of commercial power, and also has iron ore mining operations in the states of Goa and Karnataka. Besides, the company also operates in the oil and gas sector.

It all started a few months back when the promoter of Vedanta decided to delist its company under the pretext of simplifying the total corporate structure. There is no problem with such an initiative; however, timing and sequence of events put doubt on the management’s intent.

First, the management reduced the book value from Rs 189.63/share at the start of the year to Rs 146.87/share citing long-term concerns over oil prices after COVID-19. The book value was further reduced to Rs 89.38 per share as per the calculations u/s 2(57) of the Companies Act. We believe that the write-off of the oil & gas business is not warranted now as oil prices have returned to the USD 40 per bbl range. Assuming a reversal of this write-off due to the recovery in oil prices and adding back Rs 42.76 per share, the revised book value should return to its original price of Rs 189.63 per share.  

Being into the commodity business, the management has seen different commodity cycles; it was known that the prices of oil will reverse sooner or later. However, the dip in commodity prices in general and the oil prices in particular, gave the management, an opportunity to make the most out of it.

In the fourth quarter of FY20, Vedanta wrote-off Rs 17,132 crore from books on impairment of assets in oil & gas, copper, and iron ore businesses. It resulted in a reduction in the book value to Rs 89. This write-off led the company to post a net loss of Rs 12,083 crore in the fourth quarter of FY20. Considering all these, the promoter group has put the indicative offer price of Rs 87.5 per share on May 12. Even if investors are gullible enough to believe the management and their intentions how can one overlook their holdings in Hindustan Zinc, which itself valued at Rs 138 at the current market price? All these factors do not leave any chance of doubt on the management’s intention.

Entrance of a broker

Joining the management was ICICI Securities (whose institutional research report on Vedanta released on October 5, 2020), which had mentioned that the book value of Rs 89.3/share was “approved by SEBI.” This might be their judgement as everyone has a right to have an opinion. Nonetheless, what raised the red flag was the timing of the report and the mention of the regulator’s name. The reverse book building process began on October 5 and using the regulator’s name might have made the pricing more credible. There are also some investors’ forums where it was reported that after calling ICICI Direct customer care, one could place a bid. Someone said, “I was asked to place my bid at 87.25 or the system would reject my bid.”

Nonetheless, the regulator soon came into action and forced ICICI Securities to issue a clarification. To which, it wrote: 

 “The Institutional Research Team of ICICI Securities had issued Research Report on the Q1 results of Vedanta Ltd on October 5, 2020. In this report, it was inadvertently mentioned that - Vedanta has highlighted the SEBI approved book value (ex the revaluation reserves) of Rs 89.3 /share. The same should be read as - Vedanta has highlighted that the FY20 book value is Rs 89.3 /share. SEBI, as a matter of policy, neither approves nor disapproves any Book Value or Delisting Price.” 

LIC: The Saviour

Everything would have gone according to the promoter’s plan and many of the gullible investors could have surrendered their shares at a much lower value than what it is worth and might have suffered a huge loss. Nonetheless, it was LIC, the state-run insurer that saved the day for retail investors. LIC holds a 6.37 per cent stake in Vedanta that submitted all its shares at Rs 320 a piece, which is almost three times to the floor price of Rs 87.25. Finally, it was LIC's bid price that became the discovered price in the reverse book building process. Now, the management would have to dole out Rs 40,000 crore higher than what they had actually planned.

The audacity of a promoter

A promoter, being a media-savvy and trying to be in the good books of regulator & government, has lost his face. He has to understand that he cannot take minority shareholders for granted. In a recent interview with one of the media houses, he said, “Great time for Vedanta shareholders when nobody is paying cash and hence, a great time to surrender shares”.

Despite knowing everything that has been discussed in the article, the promoter managed to utter these words, which speaks a lot about his character and intention. When a lot of us are facing job losses, salary cuts, and trying to somehow meet our ends, a promoter wants to take full advantage of it! This is something that would go down in history.

The government should ban such promoters from participating in any government auction. Not only this, but the regulator should also take some strict action and stop such promoters from accessing the capital market.

Promoters like these will destroy the equity culture that has been built by promoters such as Tata. TCS, the crown jewel of Tata Group, has recently announced a buyback at a premium of almost 16 per cent to its latest traded price, despite the share price trading at a lifetime high. This clearly shows their respect towards the minority shareholders and their treatment on par with promoters. 

Note: The above article in no way should be construed as buying of Tata Group of companies. Investors should apply their discretion while investing.