Business

IIE DIGITAL DESK : Shares of Vedanta Ltd and Hindustan Zinc tumbled sharply on July 9, 2025, after U.S.-based short seller Viceroy Research released a scathing report accusing Vedanta Resources—Vedanta Ltd's UK-based parent—of operating a financially unstable, “Ponzi-like” structure that taps its Indian subsidiary, putting creditor interests at grave risk. The report triggered a sharp sell-off: Vedanta stock fell nearly 8% intraday before closing down about 4.5%, while Hindustan Zinc slid nearly 5% in early trade .

Viceroy contends that the group’s financial design is unsustainable, with Vedanta Resources extracting capital from Vedanta Ltd to service its own debt. It describes Vedanta Resources as a "parasite holding company" reliant on free cash flow, dividends, and brand fees from the Indian subsidiary—a structure Viceroy likens to a Ponzi scheme, where creditor collateral increasingly erodes .

At the heart of the critique is a roughly $5.6 billion shortfall in Vedanta Ltd’s free cash flow over the past three years, allegedly financed through fresh debt, working capital adjustments, and drained reserves. According to the report, dividends were paid not from actual earnings but borrowed funds—a red flag of hidden risk .

The report also highlights several troubling red flags:
irregularities in reported interest rates—Viceroy cites an effective interest cost of 15.8%, versus official 9–11% figures—and allegations of asset inflation, off‑balance sheet debts, and mismanagement of capital expenditure via capitalisation to inflate profits.

Crucially, Viceroy warns that this transfer of risk places creditors of Vedanta Ltd in jeopardy, as the collateral base weakens, elevating the threat of insolvency, despite recent efforts to reduce debt by $3 billion in the next three years .

Vedanta Ltd closed around 4.5% lower at ₹435, down from a near 7.8% intraday plunge. Hindustan Zinc also saw steep falls, dropping about 4–5% in early trade.The broader Nifty Metal index mirrored the decline, shedding roughly 1.7% as metal stocks reeled from the report's implications.

This sharp decline underscores investor concerns over the interconnected risks within the Vedanta Group’s financial architecture, especially given the parent company's heavy reliance on its Indian operations to support debt servicing .

Industry analysts caution that while Vedanta Ltd remains operationally robust—supported by metals and energy revenue—the governance and structural issues highlighted may dampen investor confidence and tighten credit conditions for the subsidiary. Viceroy’s repeated warnings about hidden liabilities and aggressive accounting practices could invite regulatory scrutiny, and raise pressure on credit rating agencies.

Vedanta's ongoing demerger strategy, introduced by Chair Anil Agarwal in 2023, aims to create separate listed entities to streamline operations. However, Viceroy suggests that the demerger may be a tactical maneuver intended to obfuscate mounting financial stress rather than resolve it .

Going forward, market watchers will monitor the group’s debt reduction efforts, enhanced transparency initiatives, and any formal response from Vedanta. A swift rebound in stock prices would likely depend on credible assurance that the alleged financial siphoning has ceased.

Viceroy’s report paints a troubling picture of Vedanta’s capital structure as deeply risky and possibly deceptive. The sharp market response reflects heightened investor anxiety about the group's financial practices and the sustainability of its debt strategy. As credit terms, debt servicing, and legal exposure come under the spotlight, the Vedanta Group enters a critical phase where clarity and governance will determine its market trajectory.