What was the premise of Viceroy Research's short of Vedanta?

The Hindu

12-07-2025

The story so far: India miner Vedanta Ltd.'s (VEDL) stock slumped nearly 8% on Wednesday (July 9, 2025) after Delaware-based Viceroy Research took a short on its UK-based parent Vedanta Resources (VRL)'s debt stack. In other words, wagering that the parent would default in repaying their debt. It held the holding company to be a 'parasite' with 'no significant operations of its own' feeding on cash 'extracted' from 'host' VEDL. The short seller articulated the entire structure as 'financially unsustainable, operationally compromised' accounting for a 'severe, under-appreciated risk to creditors'. Notwithstanding the fall Wednesday, the scrip shrugging off the decline closed 0.83% higher at ₹442.60.
Vedanta – Limited Resources
Viceroy is short of Vedanta Resources (PropCo), the heavily indebted parent & majority owner of Vedanta Limited (NSE : VEDL). The group structure is financially unsustainable, operationally compromised, & resembles a Ponzi scheme. $VEDL 1/ pic.twitter.com/U15v9tlnPm — Viceroy (@viceroyresearch) July 9, 2025
What is short selling?
Broadly, short-selling entails profiting from a fall in the prices of a scrip. Although it can serve many purposes, such as mitigating demand-supply imbalances in scrips and ensuring better price efficiency, among other things, it can also be potentially utilised to manipulate and drive down the prices of a scrip. Thus, prompting concerns about their intent and credibility. As a practice, it entails selling a borrowed scrip in anticipation of a downward price movement and buying it back when the lower price level is realised. Let us say, anticipating a downward movement, an individual borrows and thereafter sells 10 shares at ₹100 apiece. The total sale value is ₹1,000. The price of the share decreases to ₹85 apiece and they opt to buy the quantity back. This time it will cost them ₹850 — a direct profit of ₹150.
The short seller at the centre of the current story, that is, Viceroy Research's recent shorts on U.S.-based Medical Properties Trust and Arbor Realty Trust are important to note. Bloomberg reported July last year that federal prosecutors in the U.S. were looking into the latter company's lending practices and disclosures. Details of the reported investigation have not been made public yet. Medical Properties Trust, on the other hand, mutually decided to 'settle and dismiss' a defamation lawsuit it filed against the Delaware short seller in October 2023. The terms have been kept confidential.
Underlining their next move following their latest short position (against VRL), co-founder Fraser Perring told news publication NDTV Profit that it was in the process of making their submissions to SEBI referencing specific violations of law.
Why is Viceroy Research calling Vedanta Resources a 'parasite'?
The subject of the entire contestation is Viceroy Research's allegations that the holding company is 'systematically draining' VEDL to service its own debt load. The Delaware short seller holds the India-based unit is being forced to acquire more debt on a recurrent basis which is depleting its own cash position. The fresh capital is being raised in the guise of operational requirements entailing capital-intensive projects that it 'cannot afford'. The report adds that the alleged 'looting' erodes the fundamental value for VRL's own creditors for whom the equity stake in the Indian unit is the primary collateral. Thus, if the entity's value falls, it could potentially reverberate consequences for the parent company's ability to service debt as well.
The other set of allegations hold that Vedanta Ltd.'s interest expenses, or cost of borrowing funds, vastly exceed those determined as per their reported interest rates. This continued to scale upwards notwithstanding paydowns and restructuring. For perspective, the short seller observed that the parent company's effective interest rate more than doubled from 6.4% (2021) to 15.8% in 2025 despite having trimmed their gross debt by $3.6 billion since FY 2021. Viceroy lends three potential explanations to the reported paradigm. Firstly, it apprehends that additional expenses potentially relate to an undisclosed, off-balance sheet debts (that is, a debt not enumerated in a company's balance sheets) or a similar financial obligation, enumerated as expenses in the balance sheet. The other apprehension holds that intra-period loans entailing higher costs of borrowing are being used and repaid before reporting dates to mask the level of debt. And finally, the loan rates and/or conditions have been materially misreported.
What else do we know?
The other set of apprehensions relate to the structure for dividend payment and 'brand fee'. Both the paradigms, as inferred from the report, revolve around an understanding that Vedanta Resources does not have any significant operations of their own and no operating cash flow. Viceroy Research alleges the parent company's debt obligations, both principal and interest, are funded through dividends and brand fees from its Indian unit.
The short seller deems the framework for extracting dividends off VEDL to be 'highly inefficient'. This is because Vedanta Resources hold only 56.38% equity stake in VEDL and about 61.6% stake in Hindustan Zinc. The latter is a subsidiary of Vedanta Ltd. Thus, the Delaware short seller explains Vedanta Resources 'forces' its Indian unit to 'declare disproportionally large dividends'. This is to potentially ensure the parent can receive the sought money notwithstanding limited ownership. Viceroy Research adds, the dividends are not funded by free cash flow but by acquiring further debt and draining the balance sheet.
The other aspect relates to brand fees, or a licensing fee permitting the payee to use the brand name. Viceroy Research observed coming in as 'rolling, prepaid advances', the fees provided Vedanta Resources with upfront liquidity. 'These transactions lack commercial justification and are designed to bypass dividend leakage to minority shareholders, including the Govt of India,' it argued. The short seller elaborated VRL received $338 million in brand fees from Vedanta Ltd and its subsidiaries in FY 2024. This represented 37% of its net profit during the period. However, according to the short seller, none of the paying companies (that is, Vedanta Ltd and subsidiaries) made 'meaningful use' of the Vedanta brand other than VEDL.
How has the company responded?
Vedanta Ltd held Viceroy Research's report to be a 'malicious combination of selective information and baseless allegations' to discredit the group. The company argued the short seller's report sought to 'sensationalise the context' for the information that was already public.
Additionally, the company deemed the timing of the report to be susceptible and potentially aspiring to 'undermine' their corporate initiatives. The latter, among other things, was also referring to their proposed demerger. Vedanta Ltd intends to retain their base metals business and separate their subsidiaries, namely Vedanta Aluminium Metal Ltd., Talwandi Sabo Power Ltd. (TSPL), Malco Energy Ltd. and Vedanta Iron and Steel Ltd. into standalone entities. The idea was to 'unlock value and attract big ticket investment' for their growth. Viceroy Research however assess the proposed demerger would spread the group's insolvency across multiple, weaker entities; thus, burdening them with a 'legacy of impaired assets and unserviceable debt'.
What to make of the entire scenario?
Investment analysts and brokerages have refrained from raising an alarm.
J.P. Morgan in their report July 10 observed Vedanta Ltd reported EBITDA of $3.1 billion in FY 2025 and a net leverage (that is, the ability to borrow) of 2.2 times. 'We struggle to see financial stress at VDL with these metrics,' it stated. Furthermore, ICICI Direct Research also held the allegations to have far lesser implications on the company's operations and earnings prospects in future. The brokerage research held the company commissioning new capacities across its divisions would help cash flow from operations scaling beyond ₹35,000 crore. 'With this, it aims to trim the group's Net Debt to EBITDA from about 2-times (of EBITDA) in FY 2025 to near 1-time going ahead,' it stated. However, the brokerage warned about any potential change or delay in meeting the parent's debt maturity obligations. 'Any adverse capital allocation decision at the parent company could potentially impact growth capex, balance sheet & dividend payouts at the company level,' the note read.
What are the latest developments from Thursday?
The short seller countered the company's rebuttal alleging VEDL failed to respond to any of their concerns. Among other things, the short seller sought the rationale for paying dividends when their cumulative cash flows receded to a deficit in the past three years and how it sought to raise debt despite the unsustainable dividend. For perspective, the short seller had alleged VEDL of housing a $5.6 billion free cash flow shortfall against dividend payments of $8 billion over the last three years. It also called upon the board to justify their investments in newer ventures as semiconductors, nuclear and glass, when existing projects remained allegedly 'incomplete and underfunded'. Finally, the short seller also sought to ask if the demerged entities would be subject to cross guarantees with other subsidiaries as Vedanta Ltd and Vedanta Resources – similar to the model alleged in their latest short.
Significantly, the short seller published their report days ahead of the company's annual general meeting of shareholders. Deshni Naidoo, CEO at the parent company Vedanta Resources held at the Thursday AGM that short seller report 'compiled only part information filled with gross inaccuracies'. Enumerating Vedanta's growth strategy, she stated, 'We have created a robust business model, and, on the parent-level, our debt has been reduced by $4 billion in the last three years.' Furthermore, she underlined that VEDL would allocate ₹50,000 crore as capital expenditure over the next 3-4 years with each of the projects targeting an 18% internal rate of return.