How Vedanta Has Short-changed Its Shareholders by Getting Dividend from HZL but Not Passing It On
Independent corporate governance research and proxy advisory firm Stakeholders Empowerment Services (SES) has released a detailed note which explains how Hindustan Zinc Ltd (HZL) has not paid dividend to Vedanta shareholders in violation of its own dividend distribution policies (DDP).
In May 2020, HZL announced a dividend of Rs16.50 per share aggregating to Rs6,972 crore for FY19-20. Mumbai-based Vedanta Ltd is a 64.92% shareholder in HZL and, hence, received bulk of the sum amounting to Rs4,526 crore. This amounts to Rs12.18 for every share of Vedanta.
However, Vedanta has made an inexplicable departure from the past and is yet to distribute it to shareholders of Vedanta, in accordance with its DDP. In its annual report, Vedanta has quoted “the need for financial flexibility at the group” as the reason for holding back the dividend. Vedanta Ltd has, for the first time in at least five financial years, not passed on the ‘normal’ dividend to its shareholders which it received from HZL.
As per the DDP of Vedanta, all dividend (other than special) received from HZL shall be passed on to Vedanta shareholders in entirety.
The SES note contends “Vedanta should have ideally declared dividend upon receipt of dividend from HZL (as it is a ‘Normal Dividend’, and not a ‘Special Dividend’.”
As per Rule 43A(1) of Securities and Exchange Board of India (SEBI)‘s (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR), all the top-500 listed entities based on market capitalisation are required to formulate a dividend distribution policy which needs to be disclosed in their annual reports/website. In case the listed entity proposes to change the dividend distribution policy, it needs to disclose such changes along with its rationale in its annual report/website.
DDP of Vedanta:
The DDP of Vedanta thus makes it clear that Vedanta board does not have any discretion in not paying ‘normal’ dividend it receives from HZL.
Vedanta in its latest annual report has provided the following reason for not declaring final dividend for FY19-20 (i.e., after receipt of dividend from HZL for FY19-20): “Given the current market dislocation and uncertainties caused by the coronavirus pandemic, it is important to maximise financial flexibility across the group. Your board will decide on the size and timing of any future dividend payments once there is greater clarity on the outlook for the economy and commodity markets. Your Company believes this is the correct decision for all the stakeholders as we navigate through an unprecedented period of volatility for the global economy and our business. The Directors do not recommend final dividend for the financial year ended 31 March 2020.”
Dividend Distribution History of Vedanta
The note further observes that Vedanta has a settled practice of passing normal dividend received from HZL almost immediately to its shareholders.
Corporate governance experts had earlier pointed out that by holding back the dividend to Vedanta’s shareholders, despite having a DDP, could indirectly lead to a reduction in the company’s delisting price. They had also hinted that if the dividend was not paid now, then it would never happen if the delisting goes through.
This is, indeed, baffling when there is an ex-SEBI chairman (UK Sinha) sitting as an independent director on the board of Vedanta Ltd.
The SES note has asked some hard-hitting questions: “Can the Vedanta board decide dividend payout across the group when the financial position of the companies differs and also its shareholders are different across group entities? Given that voluntary delisting is pending, the board helped the promoter to effectively reduce delisting price by the amount of HZL dividend not paid and indirectly adding an additional Rs 2,250 crore to promoters’ kitty.”
SES has asked “Was the dividend by HZL paid only to shore up cash in Vedanta?” SES said assuming that Vedanta gets delisted this year, the entire dividend of Rs4,500 crore will be taken by the promoters, when approximately Rs2,250 crore was to be passed on to the public shareholders of Vedanta.
"The recognized stock exchanges shall take action for non-compliance with the provisions of the Listing Regulations & circulars/guidelines issued thereunder, by a listed entity as under:
• Regulation 43A: Non-disclosure of Dividend Distribution Policy in the Annual Report and on the websites of the entity.
• Fine payable and/or other action to be taken for non-compliance in respect of listed entity: Rs25,000 per instance
While the SEBI has specified penalties for non-disclosure of DDP, there is however no such action specified in Regulation 43A or aforesaid Circular, in case where dividend declared / paid or not, is as per the disclosed DDP of a Company.
Delving into whether the DDP is a promise to the shareholders, the note adds “Corporate structure, with diversified ownership, does not create a one to one contract between shareholders and company. Yet management and operations and governance of all companies is based on various laws, which can be said to reflect some sort of deemed contract between shareholders and company. In opinion of SES, DDP constitutes or implies a promise to shareholders. The SEBI LODR uses the phrase “the circumstances under which the shareholders of the listed entities may or may not expect dividend”. Therefore, DDP creates an expectation and an indirect promise to pay to shareholders.
SES has opined that if any Company does not abide by its DDP, it is in breach of a promise and the doctrine of promissory estoppel applies. The note suggests that SEBI must consider amending its laws relating to DDP to make DDP more objective.
SES has added its opinion that “Action of the Company viz. Vedanta, is not in the interest of shareholders of Vedanta, SEBI can suo motu act in the larger interest of shareholders and ensure that shareholders are paid dividend of Rs12.18/ share as soon as possible by Vedanta.”
Recently, HZL issued non-convertible debentures (NCDs) and raised Rs3,250 crore. There is no sign of any sudden slump in the business of HZL. SES is of the opinion that the shareholders must seek answers from the company regarding the sudden issuance of NCDs.
The SES note probed "HZL being a cash surplus company which pays hefty dividends to its shareholders, SES is unable to understand that why suddenly such significant amount of money is being raised through borrowings.”
In fact, only in May 2020, HZL had paid an interim dividend to its shareholders amounting to close to Rs7,000 crore. The SES note says "Therefore, SES is unable to comprehend that if the Company did require funds, then why did it declare Rs7,000 crore of dividend in May. Either it is a case of absolute absurdity in financial management or is there a plan which shareholders are unaware?”
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