Vedanta share price crashes 8%. Is Viceroy Research report behind the fall? Explained

Vedanta share price crashed almost 8% in intraday deals on Wednesday, July 9, following a report by short-seller Viceroy Research. The report flagged alleged financial irregularities at Vedanta Resources (VRL), the heavily indebted parent and majority owner of the Indian-listed Vedanta, and disclosed that Viceroy is short on VRL’s debt stack.

Viceroy Research said that the entire group structure is “financially unsustainable, operationally compromised, and poses a severe, under-appreciated risk to creditors”.

The bombshell report also impacted the shares of another subsidiary, Hindustan Zinc, which declined almost 5% today.

Viceroy, in its report dated July 9, equated the Vedanta parent VRL to a "financial zombie" or a "parasite" being kept alive by transfusions of cash from its subsidiary Vedanta.

It added that VRL is systematically draining Vedanta to service its own debt burden. Vedanta Resources is pressuring Vedanta to take on more debt and use up its cash reserves. This drains Vedanta's fundamentals, which constitute the primary collateral for VRL’s own creditors — putting the loans at risk.

“Consequently, VRL’s actions to meet its short-term obligations directly impair its creditors’ long-term ability to recover their principal, a situation that resembles a Ponzi scheme where VEDL stakeholders, which include VRL creditors, are the “suckers”,” the report stated, adding that the arrangement has pushed the entire group to the brink of insolvency, propped up only by a continuous cycle of new debt, accounting tricks, and the deferral of massive, undisclosed liabilities.

Vedanta’s interest expenses vastly exceed its reported note rates, and continues to increase despite paydowns and restructuring, Viceroy said. It also added: We evidence inflated asset values across VEDL’s large list of non-performing operating subsidiaries. The debt across these assets vastly exceeds their true value and is cross-collateralised among the Group. Further, expenses across operating subsidiaries are systematically capitalised, artificially inflating profits and asset values. This is a material misrepresentation.

While highlighting corporate governance lapses and above discrepancies, the short-seller said some of the practices are tantamount to fraud.

Vedanta is yet to reply to the allegations in the report.

Vedanta share price declined as much as 8% to the day's low of ₹420.65 apiece. With today's fall, Vedanta shares have extended today's decline to 6.67% for the year.

Meanwhile, HZL shares cracked 5% to hit a low of 415.15 on the NSE. Hindustan Zinc shares are already down 37% in a year and 19% in the past one month alone.

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