Vedanta demerger: Key lenders signal green light after months of deliberation

The proposed demerger of Vedanta Ltd into six separate listed companies has been delayed over the distribution of $7 billion of debt that the company owes to creditors in India, between the demerged companies.

“We feel (the demerger) will reduce burden and benefit the company, creditors and other stakeholders," said the first person cited above on condition of anonymity. “It will also enhance the headroom to leverage, if required, for each of the demerged verticals, and speed up the group’s renewed growth plans."

“So far, two large private sector banks have accorded their in-principle approvals and another large state-owned bank is likely to greenlight the proposal soon," said the second person, a banker to Vedanta, who also requested to not be named.

Vedanta's consortium of lenders, led by State Bank of India (SBI), includes Bank of Baroda, Punjab National Bank, ICICI Bank, Axis Bank, Canara Bank, Indian Overseas Bank, Yes Bank, Union Bank of India, IDFC First Bank, Bank of Maharashtra and Kotak Mahindra Bank, according to ratings agency Crisil.

Over the past year, debt has been the central point of all key business decisions for the London-headquartered metals, mining and energy conglomerate Vedanta Resources, the parent of Mumbai-headquartered Vedanta Ltd.

The bankers now seem to be seeing “merit in the proposal" to split the company into six separate listed entities, the two persons said.

The banker cited above, who is a part of the consortium of Vedanta’s lenders, said SBI Capital Markets (SBI Caps) has sent the banks a draft version of its report on the proposed Vedanta demerger. The creditors had appointed SBI Caps in March to assess issues such as distribution of debt and the possible impact on lenders following the demerger.

While the contents of SBI Caps’ report could not be immediately ascertained, the banker said that lenders now feel it is in their best interests to allow the merger.

The demerger of Vedanta, which commands a market capitalization of ₹1.5 trillion, will be one of the biggest in the listed space. The demerger of Jio Financial Services from Reliance Industries Ltd., which was completed last year, is the largest.

Emails sent to Vedanta, consortium leader SBI, and to SBI Caps remained unanswered till press time.

The process of approval

Vedanta will have to send a no-objection certificate from the lenders to the Securities and Exchange Board of India (Sebi) for the market regulator’s mandatory clearance. Following Sebi's approval, the demerger proposal will be put up before the National Company Law Tribunal (NCLT).

“The final decision on whether to approve or disapprove of the demerger will be decided by the consortium through voting after it is convened by the NCLT (National Company Law Tribunal," said the banker.

For the demerger to go through, a formal approval by majority vote of the consortium of lenders will be compulsory.

“Vedanta is planning to close all the required formal approval processes for the demerger within the first week of June, with an aim to complete the demerger within the next 6-9 months," said the first person.

Once the final approval for the demerger—one of the biggest in the listed space—is granted, Vedanta's group companies may seek fresh lines of credit from their current creditors to obtain growth capital for each vertical, the first person added.

Demerger and debt

In September, Vedanta Ltd had announced the demerger of its metals, power, aluminium, and oil and gas businesses to unlock value.

The exercise will create six independent verticals—Vedanta Aluminium, Vedanta Oil & Gas, Vedanta Power, Vedanta Steel and Ferrous Materials, Vedanta Base Metals and Vedanta Ltd.

Mint had earlier reported that lenders were concerned about the lack of clarity on how their debt will be split among the various business units following the mining behemoth’s proposed demerger, citing two bankers aware of the discussions.

Ajay Agarwal, president (finance), Vedanta Ltd, had said in an earnings’ call on 25 April that all the debt will get allocated across each of the demerged entities in the ratio of the assets in which the asset gets allocated amongst the six different demerged entities.

To address lenders’ concern over debt appropriation, Agarwal had said, “We have apportioned the debt across the six entities. And based on this formula, we have gone to the lenders for the specific approval."

Besides the demerger, the group has been making several attempts to deleverage its balance sheet. At the parent level, in Vedanta Resources Ltd., apart from deleveraging in the current fiscal, sometime in January, Vedanta went for debt restructuring.

The parent needs $1-1.1 billion in the current fiscal to take care of the liabilities, out of which about $620 million is required in the first quarter.

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In its recent earnings call, Vedanta said it is allocating and committing $1.9 billion capex in the current fiscal (FY25), with the largest commitment of $800 million going into power and artificial intelligence.

A fortnight ago, the group said it would raise ₹2,500 crore by issuing non-convertible debentures (NCDs) through private placements.

Vedanta Ltd’s net debt stood at ₹56,338 crore as on 31 March, said the company while announcing its annual financials last week.

Crisil Ratings on 22 March continued its “rating watch" on the bank facilities and debt instruments of Vedanta Ltd with developing implications.

As per Crisil, the developing watch continues to factor in the corporate announcement by Vedanta that it will demerge its aluminium, oil and gas, power, base metal (zinc international and copper business) and iron and steel businesses into separate standalone listed entities.

“However, the deal will need requisite approvals, including from shareholders and lenders, and could take three-four quarters for completion. Also, clarity on allocation of assets and liabilities across entities under the proposed structure, along with group or parent support philosophy for each entity, is yet to emerge," Crisil Ratings said.

Typically, a demerger, which entails the separation of businesses of a conglomerate into two or more entities, is proposed to improve operations.

Also Read: Vedanta targets $7.5 bn in earnings in 2 years, deleverage group by $3 bn