Hindustan Zinc’s 'Excessive' Dividend Payout Calls For a Probe: EAS Sarma

New Delhi: E A S Sarma, a former secretary to the Union government, has called for a probe into “excessive dividend pay-outs” by Hindustan Zinc Ltd. (HZL), a subsidiary of the heavily debt-ridden Vedanta Group, in which the government holds 29.54% share.

In an open letter to Finance Minister Nirmala Sitharaman, Sarma cautioned the government on the Vedanta Group’s “designs” aimed at enabling the “promoters to repay debt, ignoring the rapid erosion taking place of the intrinsic value of HZL.”

“Allowing a private company thus to overexploit the country’s scarce Zinc reserves is a serious matter that calls for an independent enquiry. I would demand that such an enquiry be instituted forthwith, in addition to your Ministry even at this belated stage reviewing HZL’s dividend payment policy,” said the letter.

Read the full letter below:

Regards,

To

Smt Nirmala Sitharaman

Union Minister (Finance, Corporate Affairs & DIPAM)

Dear Smt Sitharaman,

Please refer to my letter of September 28, 2024 cautioning the government on a heavily debt-ridden Vedanta Group fleecing its subsidiary, Hindustan Zinc Ltd (HZL) in which the government has an equity share of 29.54%, by forcing HZL to pay excessively large dividends to enable the promoters to repay debt, ignoring the rapid erosion taking place of the intrinsic value of HZL (https://countercurrents.org/2024/09/vedantas-high-dividend-pay-outs-erode-the-intrinsic-value-of-hzl-in-which-the-government-has-a-29-54-equity-share/)

I understand that HZL’s promoter, the Vedanta Group, evidently supported by the government, continues to bleed the company in order to enable its London-based parent company to repay its debt (https://www.livemint.com/market/stock-market-news/vedantas-debt-burden-hindustan-zinc-net-debt-company-financials-sensex-nifty-11750669720193.html#:~:text=The%20pressure%20peaked%20in%202023,A%20lot%20of%20it.)

Under Section 123 of the Companies Act, it is illegal for a company to pay dividends from any source other than profits. During the time frame 2017-18 till date, HZL has paid more than Rs 80,000 crores, often in excess of yearly profits, implying diversion of its internal resources for that purpose. The Vedanta Group which has an equity share of 63.42% has thus paid itself more than Rs 50,000 Crores during that period, whereas the government with an equity share of 29.54% would have received around Rs 20,000 Crores. Your Ministry has evidently welcomed the inflow of such a large dividend amount into the public exchequer, ignoring the enormous damage caused on that account to the long-term financial health of HZL and its far reaching implications in terms of depletion of scarce but highly valuable Zinc reserves of the country.

In the normal course, HZL ought to have apportioned adequate funds from out of its internal resources for investment in exploration of Zinc/Lead ore to make sure that such exploration activity results in replenishment of every tonne of the ore depleted for production of zinc, in order to ensure that zinc production remains sustainable in the long-run. 

During the time span from 1-4-2013 to 1-4-2020, the Zinc/Lead reserves (UNFC classification) actually declined marginally from 103.27 million tonnes to 102.79 million tonnes, whereas the company would have produced during that timespan a total quantity of around 130 million tonnes. In other words, while at the production level of 2013-14, the country’s Zinc reserves would have lasted 11years, at today’s production level, they would last for less than 7 years! It shows that, as a result of excessive annual dividend pay-outs, HZL’s internal resources have got diverted as dividend payments largely to the Vedanta Group to enable that group to repay its excessive debt, at the cost of HZL’s exploration effort, leading in turn to stripping of its scarce Zinc reserves. 

Zinc is categorised as a “critical mineral” by the USA (https://www.iea.org/policies/15271-fi nal-list-of-critical-minerals-2022 ) to whom a portion of the Zinc produced in India gets exported. Among other countries, India also exports Zinc to China. Had HZL been prudent enough to minimise dividend pay-outs to the Vedanta Group and other shareholders including the government, it would have invested adequately in exploration activity to maintain long-term sustainability in Zinc mining and leveraged Zinc exports to its strategic advantage. Though Ministry of Mines is represented by three senior officers on the Board of HZL and that Ministry, in consultation with your Ministry, could have exercised its right as an important minority shareholder to regulate HZL dividend policy, evidently in connivance with your Ministry and perhaps to grant an undue benefit to the Vedanta Group, it has meekly allowed that group to have an unquestioned sway over diversion of internal resources to fill the group’s coffers at the cost of public interest.

It is ironic that in the midst of this, DIPAM under your stewardship should undertake a parallel exercise to sell a portion of the government’s shareholding in HZL, knowing well that the intrinsic value of HZL is getting eroded as a result of HZL’s dividend pay-out policy supported by the government. It gives one the impression that the proposal to disinvest a portion of the government’s stake in HZL is aimed at underselling it.

Allowing a private company thus to overexploit the country’s scarce Zinc reserves is a serious matter that calls for an independent enquiry. I would demand that such an enquiry be instituted forthwith, in addition to your Ministry even at this belated stage reviewing HZL’s dividend payment policy. 

Regards,

Yours sincerely,

E A S Sarma

Former Secretary to the Government of India

Visakhapatnam.