Has the government unwittingly or otherwise reduced HZL’s value as a prelude to proposed sale of its 29.54% equity sale?

Hindustan Zinc Ltd


Smt Nirmala Sitharaman

Union Finance Minister

Dear Smt Sitharaman,

From media reports, it appears that both DIPAM and the Ministry of Mines are in a hurry to divest the government’s equity share of 29.54% in Hindustan Zinc Ltd. (HZL), without appreciating the strategic and financial implications of the proposal.

In this connection, I invite your attention to my letters dated 27-5-2022, 7-2-2023 & 24-2-2023 addressed to the Cabinet Secretary (https://countercurrents.org/2023/02/ministry-of-mines-dubious-stand-against-hzls-proposed-acquisition-of-overseas-zinc-mines-through-a-mauritius-based-company/ & https://countercurrents.org/2023/02/hindustan-zinc-ltd-hzl-proposed-acquisition-of-overseas-zinc-companies-in-namibia-and-s-africa-is-questionable/), pointing out the implications of the proposed divestment, especially in the context of HZL’s majority shareholder, Vedanta Group’s attempt to commit HZL’s Board of Directors, including the government’s three nominee representatives, to acquiring its Mauritius-based company, THL, indirectly having a stake in zinc assets in S.Africa and Namibia. Apart from its being a related party transaction, the Mauritius-based company is itself involved in multiple related party transactions and liabilities arising from them.

The THL deal would strip HZL of its financial resources to the extent of Rs 24,700 Crores, in addition to exposing it to additional liabilities, which will push HZL into high indebtedness, thus reducing its intrinsic value and the potential proceeds that can be expected from the sale of government’s residual share of 29.54%. Belatedly, the Ministry of Mines has informed the Vedanta Group that it would oppose the move, though subject to a questionable caveat, a possible escape route for the group.

A far more serious development that has taken place over the last 9 years has been an attempt on the part of the Ministry of Finance itself that has perilously bled HZL of a large portion of its internal resources, which in turn has unwittingly or otherwise allowed the Vedanta Group to take away the lion’s share of it, by way of dividend payouts to itself.

Instead of encouraging CPSEs like the CIL and the ONGC and partly owned undertakings like the HZL, to reinvest their internal resources in exploration and development of scarce minerals entrusted to them, the Ministry of Finance has forced those undertakings to pay huge dividends to the government, bearing no relationship whatsoever with their profitability, on the questionable ground that such dividend payouts will help the government to bridge the fiscal gap. As a result, these undertakings have diverted their limited resources from their respective exploration activities to paying dividends to the government, leading to a decline in the reserve-to-production ratios for the minerals and its adverse impact on sustainability of mining itself.

In the specific case of HZL, which is India’s premier zinc explorer and developer, the company is left with hardly 100 million tonnes of extractable ore, which, at today’s rate of production, will not last more than 8-9 years. Since HZL is unable to replenish ore depletion with new deposits discovered, the economic life of HZL’s zinc mines will decline further. This has certainly eroded its economic value.

Indirectly, these large dividend payouts, consciously promoted by the Ministry of Finance itself, have resulted in stripping HZL of Rs 69,770 Crores over the last 9 years, to that extent eroding its ability to explore for new zinc deposits and enhance the reserve-to-production ratio. While the government may have received a little less than 30% of these dividend payouts, the greater beneficiary of it has been the Vedanta Group itself, which has received Rs 45,290 Crores. In other words, the imprudent CPSE dividend policy of the Ministry of Finance has, in the specific case of HZL, benefitted the Vedanta Group far more than the government!

There are reports of the Vedanta Group facing liquidity problems (https://www.business-standard.com/article/companies/vedanta-cuts-net-debt-by-2-billion-in-fy23-as-funding-woes-linger-123021500807_1.html) and both the proposal of Vedanta that HZL should acquire the Mauritius-based THL and the high CPSE dividend payout policy of the Ministry of Finance seem to have been so designed as to benefit the Vedanta Group in that context.

But a more serious concern that arises from this is an apparently well-orchestrated move on the part of the Ministry of Finance to erode the intrinsic value of HZL at a time when the government is about to sell its 29.54% equity share. This clearly implies that the government is going to sell its share at a highly depressed price, to the detriment of the public interest.

Against this background, if DIPAM and the Ministry of Mines obstinately insist on going ahead with the proposed sale of the government’s residual share in HZL, it calls for an independent investigation, as it is highly detrimental to the public interest.

Even otherwise, zinc being a critical mineral in great demand (the global extractable reserves may not last more than 20 years at today’s production levels), it will be prudent on the part of the government to latch on to its 29.54% stake in HZL. The proposal to sell it is ill-advised and it deserves to be dropped altogether.

The Ministry of Finance should also revisit its high CPSE dividend payout approach and instead encourage the mining CPSEs to reinvest their resources on exploration activity, to be able to find new mineral deposits.

As an immediate measure, the Ministry of Mines should be advised to resort to legal means, if necessary, to contest Vedanta’s move to force HZL to acquire its Mauritius-based subsidiary, THL and ensure that the proposal is dropped.

The government should also revisit the Modified Scheme introduced by the Ministry of Information Technology for setting up Semiconductor Fabs in India, vide its communication W-38/21/2022-IPHW dated 4-10-2022, which would imply the government subsidising 50% of the cost of the Vedanta Group’s proposed semiconductor fabrication unit in Gujarat, to a whopping extent of around Rs 75,000 crores spread over five to six years, when equally, if not more important social sector schemes such as MGNREGA and food security schemes that provide social security cover for the disadvantaged are starved of budgetary allocations. Subsidising 50% of the project cost in the case of a private company, that too for setting up a facility that may not offer a technology that is adequately competitive, cannot be justified.

I hope that your Ministry and the other concerned Ministries respond to these concerns and take decisions consistent with the public interest.


Yours sincerely,

E A S Sarma
Former Secretary to Government of India

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