New Delhi | US short seller Viceroy Research on Wednesday called billionaire Anil Agarwal-led British firm Vedanta Resources a "parasite" that is "systematically draining" its Indian unit, an allegation which the group called as "selective misinformation and baseless" aimed at discrediting it.
The US firm took a short position against the debt of Vedanta Resources, the UK-based parent of Indian miner Vedanta Ltd, alleging that the group "is a house of cards built on a foundation of unsustainable debt, looted assets, and accounting fiction."
Vedanta responded saying the report was "a malicious combination of selective misinformation and baseless allegations" and that its authors issued it without contacting the group.
"Vedanta Resources Ltd (VRL) is a 'parasite' holding company with no significant operations of its own, propped up entirely by cash extracted from its dying 'host': Vedanta Ltd (VEDL)," Viceroy said in an 85-page report.
VEDL has paid dividends worth Rs 75,800 crore in the last four fiscal years, while its unit Hindustan Zinc paid another Rs 57,300 crore over the same period. 56.38 per cent of the dividend payout at VEDL went to Vedanta Resources in line with its shareholding, and 61.62 per cent in Hindustan Zinc.
Viceroy said VEDL has accrued USD 5.6 billion free cash flow shortfall against dividends over the last 3 years while its net debt has increased by USD 6.7 billion (around 200 per cent) since FY22.
"VEDL has depleted its cash reserves and exhausted its ability to borrow money and 'liquidate' working capital items," it said.
Conversely, over the same period, VRL's interest costs have increased by USD 200 million per year. It reported FY25 total interest costs of USD 835 million against USD 4.9 billion of gross debt implies an effective interest rate of 15.8 per cent, the report said adding this was inexplicable as the London-based company's publicly issued bonds and disclosed term loans carry rates closer to 9-11 per cent.
"We see only three possible explanations, all of which suggest a level of financial misconduct: Undisclosed, off-balance sheet debt is being serviced, with the costs disguised as interest expenses. This would be fraud. (Secondly) high-cost intra-period loans are being used and repaid before reporting dates to mask the true level of debt. (And thirdly) loan rates or conditions are materially misreported to the market," it said.
The same phenomenon is observed at VEDL, where actual interest expenses in FY25 were USD 368 million higher than its reported weighted average borrowing costs would suggest, implying significant intra-period borrowing to manage liquidity. This is supported by VEDL's precarious working capital ratio, which has been well below 1.0 since FY23, indicating its current liabilities vastly exceed its current assets.
On mechanisms of cash extraction, it said VRL employs several key mechanisms to drain cash from VEDL - unsustainable dividends (VEDL's dividend policy is dictated entirely by VRL's financing needs, not by its own ability to generate cash), Artificial Brand Fees (VRL extracts hundreds of millions of dollars annually from VEDL and its subsidiaries through "brand fees" that lack any commercial justification), VRL loans from VEDL subsidiaries.
"Our forensic investigation into Vedanta's key operating subsidiaries reveals a portfolio riddled with financially unviable assets, undisclosed liabilities, systematic fraud, and profound governance failures. The book values reported by VEDL are fiction," the report said.
It went on to cite the example of VEDL's Dubai-based subsidiary, Fujairah Gold, which it said has multiple red flags suggesting it deals in undocumented or illicit gold.
"The Vedanta Group is a house of cards built on a foundation of unsustainable debt, looted assets, and accounting fiction. The VRL financial zombie being kept alive by transfusions of cash from its subsidiary VEDL," the report said. "The proposed demerger will merely spread the group's insolvency across multiple, weaker entities, each burdened with a legacy of impaired assets and unserviceable debt. The structure is fundamentally broken and headed for a disorderly collapse."
VEDL plans to split different businesses into separate entities.
Viceroy said it was shorting the debt stack of Vedanta Resources (VRL), the parent company and majority owner of Mumbai-listed Vedanta Ltd (VEDL), as it released the 85-page report.
Shorting debt, also known as short selling of bonds, is a trading strategy where an investor looks to profit from a decline in the price of bonds or other debt instruments. It involves borrowing the bond, selling it at the current market price, and then buying it back later at a potentially lower price to return to the lender, pocketing the difference as profit.
Vedanta stocks fell as much as 6 per cent following the report release but recovered some losses and closed at Rs 440.80 on the BSE, down 3.4 per cent over the previous close.
Calling VRL a "heavily indebted parent", Viceroy said, "The entire group structure is financially unsustainable, operationally compromised, and poses a severe, under-appreciated risk to creditors".
To service its own debt burden, VRL is "systematically draining" VEDL, forcing the operating company to take on ever-increasing leverage and deplete its cash reserves. "This looting erodes the fundamental value of VEDL, which constitutes the primary collateral for VRL's own creditors," the report added.
Responding to the report, Vedanta in a statement said, "The report is a malicious combination of selective misinformation and baseless allegations to discredit the Group".
"It has been issued without making any attempt to contact us with the sole objective of creating false propaganda. It only contains a compilation of various information, which is already in the public domain, but the authors have tried to sensationalise the context to profiteer from market reaction," it said.
Alleging that some of the "material quantitative and qualitative discrepancies" in Vedanta group could "tantamount to fraud", Viceroy highlighted what it called the 'Bait and Switch Funding Model' where VEDL promotes ludicrous capital-intensive projects that it cannot afford in order to raise fresh capital. This capital is then paid out to the PropCo (parent company) to service its debt.
Among others, it called out Vedanta's interest expenses vastly exceeding its reported note rates, evidence of inflated asset values, expenses across operating subsidiaries being systematically capitalised to artificially inflate profits and asset values, and billions of dollars of disputed expenses kept off-balance sheet and undisclosed in financial reports.
"Vedanta presents systematic governance failures across management and auditors, including inappropriate auditor choices," it alleged.
"To cure its maladies, VRL has proposed a demerger of the entities it has rolled up through its decades-long acquisition strategy, which it now claims are more valuable individually. This fails to address the fundamental cash crunch and will saddle the resultant companies with unsustainable debts from their inception."
It goes on to term VRL "a financial zombie" that is being kept alive by transfusions of cash from its subsidiary VEDL.
The report came on a day before Agarwal, chairman of Vedanta Ltd, is to address the company's shareholders at the annual general meeting.
"The timing of the Report is suspect and could be to undermine the forthcoming corporate initiatives. Our stakeholders are discerning enough to understand such tactics," Vedanta said. "In fact, to avoid any responsibility, authors of the report have added various disclaimers that the Report has been prepared for educational purposes only and expresses their opinions and are not statements of fact."
Vedanta said it remains focused on the business and growth, and requested everyone to avoid speculation and unsubstantiated allegations.
In response, the Viceroy Group wrote on "X" that Vedanta has dismissed its 85-page 'thoroughly referenced' report without any attempt to disapprove their work. "This is likely because they cannot refute our findings. We stand behind our work and are happy to take questions," Viceroy said.
The strategy to make a profit from a declining stock deployed by Viceroy is the same as that used by another US short seller Hindenburg Research in January 2023 against the Adani group. Hindenburg, which has since shut down, had called the alleged "brazen stock manipulation and accounting fraud" by the Adani Group.
While Adani group refuted the allegations, calling them "baseless" and "malicious", the Hindenburg report led to group stocks losing as much as USD 150 billion in value at their lowest point.
In another post, Viceroy said, "In lieu of a response: Vedanta simply has outlined details of our legal disclaimer. This is the laziest response to any report we have published in our 8+ year history".
"We stand behind our work, and are happy to take questions," it added.
