Anil Agarwal-led Vedanta on Monday clarified subsidiary Cairn India’s transaction in Volcan Investments, saying it would provide significantly higher returns compared to other cash management investments overseas, which would typically earn 2 per cent.
“This investment instrument will give us returns close to 10 per cent in foreign currency by October 2020. This transaction does not change any existing shareholding pattern for any of the companies,” Srinivasan Venkatakrishnan, CEO of Vedanta Resources, said.
Volcan Investments owns 100 per cent stake in London-based Vedanta Resources, which owns 50.1 per cent in Vedanta. Cairn India Holdings is a subsidiary of Vedanta. “This transaction does not involve any equity ownership and, in fact, can be looked at a fixed deposit where a principal amount is assured along with a certain rate of returns,” said G R Arun Kumar, executive director Vedanta and group CFO at Vedanta Resources. Volcan Investments owns 21 per cent of Anglo American and is a family trust of promoter Anil Agarwal.
Meanwhile, Moody’s on Monday changed the outlook on Vedanta Resources’ ratings to negative from stable. Vedanta clarified that Cairn India Holdings’ £0.5-billion investment in Volcan as part of a structured investment represents an economic interest in upside potential of 24.71 million shares or 1.8 per cent outstanding shares of Anglo American.
Anglo American is a globally diversified mining business that comprises De Beers (the largest diamond entity), copper, platinum and other precious metals, iron ore, coal and nickel.
Since Thursday’s close, the stock has declined 18 per cent as analysts downgraded the stock. “Though the transaction has taken place after board approval, there is no mention where the board considered options other than Anglo American for investment in such an instrument,” said a Mumbai-based analyst on condition of anonymity. Vedanta said the investment was made on an arms’ length basis in December 2018 after meeting all governance requirements.
Kaustubh Chaubal, vice-president and senior credit officer, explained Moody's downgrading of the outlook: “We view the related-party investment as credit negative for Vedanta and a means to fund the risk appetite of its shareholder, a clear indication of the company's willingness to deploy cash at Vedanta to support Volcan interests."
The economic interest was valued by an independent valuer and approved by the boards of Cairn India and Vedanta. The ownership of shares of Volcan underlined for this transaction, and the associated voting interest also remain with it.
While the downside risk is protected analysts at Motilal Oswal securities say that although this transaction appears at arm’s length, the counter party risk is high because parent drives its value from Vedanta itself, which is highly leveraged. Investors are now concerned about future allocation of capital, especially from foreign subsidiaries say analysts.