According to Hindu tradition, “Vedanta” is a philosophy that delivers an understanding of true reality.
The Indian billionaire left school aged 15 in Bihar and started as a scrap metal dealer; 36 years later, he’s the boss of India’s biggest resources group with a personal fortune of $3.8bn (£2.36bn).
Listed in London, Vedanta is officially also one of Britain’s biggest companies and the subcontinent’s only representative on the FTSE 100 (FTSE Index: EO100.FGI - news) . With operations in coal, zinc, gold, iron ore and oil spread across four continents, it ranks seventh on the list of global mining giants.
However, just last month, Agarwal said he had a “dream”: to create an Indian resource major that would compare with the best in the world. “BHP is from Australia, Vale is from Brazil,” he said in an interview. “India, too, must have its mineral resources major, for we have a similar geology.”
It sounded an odd ambition, given Vedanta’s impressive accolades. But, as Agarwal inferred, despite statistically rubbing shoulders with global mining giants like BHP Billiton (NZSE: BHP.NZ - news) and Rio Tinto (Berlin: CRA1.BE - news) , for investors, Vedanta is a world apart.
The company has risks that a few years ago were accepted in London as part of the gold rush for emerging-market resources companies. But in the wake of the debacles at fellow resources companies ENRC and Bumi, they are now considered unnerving.
There’s still plenty of buccaneering enthusiasm for excavating in India, Zambia and Liberia. But the appetite is refined for companies with single controlling shareholders, mind-numbingly complex structures and opaque accounts. Vedanta has all these characteristics in spades.
A source close to the company said: “There’s a scramble to distinguish between good oligarchs and bad oligarchs. Vedanta wants to be thought of on par with Rio and BHP, or at least Kazakhmys (Other OTC: KZMYF.PK - news) and Antofagasta (Other OTC: ANFGF.PK - news) . But too often we’re hearing people talk about ENRC, Bumi and Vedanta.”
The Financial Services Authority (FSA) is on the warpath, too. The regulator has been lambasted for having a relaxed approach to foreign listings. Even the directors of ENRC described the company’s operating style as “more Soviet than City”. The FSA has announced a review of the listing rules, with a specific warning that it intends to clamp down on foreign firms with dominant shareholders.
Meanwhile, Vedanta is being sifted from the buy lists of UK fund managers. Some are even questioning whether it’s an appropriate member of the FTSE 100 at all.
One London asset manager said: “Vedanta gives you a headache just to look at it. It’s a thicket of complex companies, subsidiaries and obscure offshore investment vehicles.”
The company, its brokers and existing shareholders argue that Vedanta is misunderstood. They say the numbers distort the real story of one of the world’s fastest-growing resources companies that London is lucky to host.
But even the company admits it must reform, and fast. In February, Vedanta announced that a long-promised and radical restructuring would happen during 2012 . With two months to go, delivery is being frustrated by delays in the Indian courts permission from which is needed before the overhaul can proceed.
For Vedanta, it’s a nerve-racking countdown: can it reform fast enough or will UK investors and regulators lose patience? If the Indian courts refuse permission for the restructuring, what next?
Ostensibly, the biggest risk at Vedanta is Agarwal himself. Vedanta’s founder owns and controls almost 60pc of the company. The key component of the group is Sterlite Industries, the company Agarwal founded in 1976; a large part of the rest consists of his family’s assets that he brought together under Vedanta in 1986.
The Agarwal shares are held in a Bermudian company called Volcan Investments, which, Vedanta’s official documents repeatedly declare, does not file group accounts.
The dominance of the founder has caused alarm from the start. In 2004, after the company’s first annual meeting, analysts at Nostromo Research noted investor opposition to the re-election of various directors. “Not that this mattered one wit, of course, since Anil Agarwal, architect of Sterlite Industries and Vedanta’s CEO has, along with his kith and kin, more than enough shares to take the company to war on Pakistan if he chose, and without consulting anyone else,” they wrote.
In practice, Vedanta’s operations have been challenged not least by fierce opposition from the Dongria Kondl people in India’s Nigamgiri Hills, upon whose sacred site Vedanta has based its Orissa mine. Vedanta is also embroiled in a battle with environmental activists at its Sesa operations in Goa.
But, overall, Vedanta’s brokers at JP Morgan Cazenove and Morgan Stanley (Dusseldorf: 653571.DU - news) say institutional investors are relaxed about Agarwal’s stake, particularly once they understand that his only assets are Vedanta shares.
A source close to the company said: “Agarwal’s interests are wholly aligned with the company and other shareholders. The company is easier to understand from this perspective.”
The FSA’s proposed changes to the listing rules may require Vedanta to beef up its board with more independent directors.
But the big sticking point is Vedanta’s structure. Vedanta is not really a miner, but a holding company of no fewer than 99 “principle subsidiaries”, according to its report and accounts.
Adding to its complexity is the fact that, rather than owning its assets outright as other majors do, Vedanta owns a collection of stakes that, on paper at least, add up to alarmingly tenuous links with the mines.
Last year, Vedanta said its “non-controlling interests”, or the proportion of the company’s assets that are in fact owned by someone else, amounted to 59pc of the company. In the latest report and accounts, filed in March, non-controlling interests soared to 75pc of the company.
In other words, although Vedanta claims to have assets of $18.4bn, shareholders in the parent company own just $4.7bn.
Vedanta’s brokers spend large amounts of time patiently explaining the genius of the structure, which is mostly to do with Vedanta buying assets as they have been partially privatised by the Indian government.
Other peculiarities have arisen because of unusual Indian regulations. For example, Indian companies are banned from making domestic acquisitions funded by debt. So, to buy the Indian assets of Cairn Energy (LSE: CNE.L - news) , the Edinburgh-based oil company, Agarwal created an offshore vehicle called Twinstar Holdings Mauritius through which to make the acquisition.
In Vedanta’s accounts, Twinstar raises eyebrows since it is the beneficiary of a $3.137bn loan made by the parent company in the last year. Again, the company would say this is all obvious as long as you know the back story.
Vedanta’s brokers insist the key point is that Vedanta controls its assets entirely, which is a listing requirement under FSA rules.
In its accounts, the “economic percentage holdings” are distinguished from the “immediate percentage holdings”.
Even so, the structure has a strange impact on Vedanta’s numbers. Some 5pc of last year’s profits was attributable to Vedanta; 95pc was attributable to the other parties. The dividend of £60m was paid to parent company holders; but it was £144m for other the parties. Meanwhile, Vedanta is liable for large amounts of debt: the subsidiaries owe the company some $5.8bn.
Vedanta is a big borrower in the bond markets in 2008 it successfully raised the biggest corporate bond issue of $1.25bn. Some of its borrowings are expensive, at interest rates of 8pc and 9pc, which the company says is a reflection of India’s low credit rating.
It seems odd that the company needs to borrow at all since its balance sheet shows a whopping $6.9bn of cash. But the money is all held at the subsidiary level, which the company says is hard to extract efficiently.
The radical restructuring is designed to ease the pressure on Vedanta’s cash flow. It is also hoped that it will bring some much-needed transparency to the company.
The grand idea of the restructuring is to combine the complex holdings of Sterlite with Sesa Goa (BSE: SESAGOA.BO - news) , India’s biggest iron ore producer that Vedanta bought 57pc of in 2007, so that investors are presented with a streamlined view of the company. Sesa Goa and Sterlite shareholders approved the merger on June 25 2012, while Vedanta’s shareholders approved it at the general meeting on June 15, 2012.
The snag is that the move requires the approval from Indian authorities, which Vedanta was expecting to have in September. There are signs that investors are losing patience: the shares are down almost 30pc since the restructuring was announced.
In the meantime, Vedanta is left to rely on its financial results. A company source said: “In 2004, ebitda [earnings before interest, tax, depreciation and amortisation] was $323m; at the full year 2012 it was $5.35bn. The float price was 390p in 2003, it’s 1,145p today.”
Vedanta is hoping to maintain the upward trajectory at its interim results on Thursday. But a fund manager said: “It’s going to take more than results to win us round. If Vedanta wants to be treated like a big major, it needs to look like one, too.”