New Delhi, Jul 9 (PTI) US short seller Viceroy Research on Wednesday released a report charging billionaire Anil Agarwal's mining conglomerate to be "financially unsustainable" and posing a severe risk to creditors, allegations which the group called "selective misinformation and baseless" aimed at discrediting the group.

Viceroy said it was shorting the debt stack of Vedanta Resources, the parent company and majority owner of Mumbai-listed Vedanta Ltd, as it released the 85-page report.

Shorting debt, also known as short selling of bonds, is a trading strategy where an investor looks to profit from a decline in the price of bonds or other debt instruments. It involves borrowing the bond, selling it at the current market price, and then buying it back later at a potentially lower price to return to the lender, pocketing the difference as profit.

Vedanta stocks fell as much as 6 per cent following the report release but recovered some losses. It was trading at Rs 440.05 on the BSE at 1400 hours, down 3.54 per cent over the previous close.

Calling Vedanta Resources Ltd (VRL) a "heavily indebted parent", Viceroy said, "The entire group structure is financially unsustainable, operationally compromised, and poses a severe, under-appreciated risk to creditors".

"VRL is a 'parasite' holding company with no significant operations of its own, propped up entirely by cash extracted from its dying 'host: Vedanta Ltd (VEDL)," it said.

To service its own debt burden, VRL is "systematically draining" VEDL, forcing the operating company to take on ever-increasing leverage and deplete its cash reserves. "This looting erodes the fundamental value of VEDL, which constitutes the primary collateral for VRL's own creditors," the report added.

Responding to the report, Vedanta in a statement said, "The report is a malicious combination of selective misinformation and baseless allegations to discredit the Group".

"It has been issued without making any attempt to contact us with the sole objective of creating false propaganda. It only contains a compilation of various information, which is already in the public domain, but the authors have tried to sensationalise the context to profiteer from market reaction," it said.

Alleging that some of the "material quantitative and qualitative discrepancies" in Vedanta group could "tantamount to fraud", Viceroy highlighted what it called the 'Bait and Switch Funding Model' where VEDL promotes ludicrous capital-intensive projects that it cannot afford in order to raise fresh capital. This capital is then paid out to the PropCo (parent company) to service its debt.

Among others, it called out Vedanta's interest expenses vastly exceeding its reported note rates, evidence of inflated asset values, expenses across operating subsidiaries being systematically capitalised to artificially inflate profits and asset values, and billions of dollars of disputed expenses kept off-balance sheet and undisclosed in financial reports.

"Vedanta presents systematic governance failures across management and auditors, including inappropriate auditor choices," it alleged.

"To cure its maladies, VRL has proposed a demerger of the entities it has rolled up through its decades-long acquisition strategy, which it now claims are more valuable individually. This fails to address the fundamental cash crunch and will saddle the resultant companies with unsustainable debts from their inception." It goes on to term VRL "a financial zombie" that is being kept alive by transfusions of cash from its subsidiary VEDL.

The report came on a day before Agarwal, chairman of Vedanta Ltd, is to address the company's shareholders at the annual general meeting.

"The timing of the Report is suspect and could be to undermine the forthcoming corporate initiatives. Our stakeholders are discerning enough to understand such tactics," Vedanta said.

"In fact, to avoid any responsibility, authors of the report have added various disclaimers that the Report has been prepared for educational purposes only and expresses their opinions and are not statements of fact." Vedanta said it remains focused on the business and growth, and requested everyone to avoid speculation and unsubstantiated allegations.

In response, the Viceroy Group wrote on "X" that Vedanta has dismissed its 85-page 'thoroughly referenced' report without any attempt to disapprove their work.

"This is likely because they cannot refute our findings. We stand behind our work and are happy to take questions," Viceroy said.

The strategy to make a profit from a declining stock deployed by Viceroy is the same as that used by another US short seller Hindenburg Research in January 2023 against the Adani group. Hindenburg, which has since shut down, had called the alleged "brazen stock manipulation and accounting fraud" by the Adani Group.

While Adani group refuted the allegations, calling them "baseless" and "malicious", the Hindenburg report led to group stocks losing as much as USD 150 billion in value at their lowest point.

Viceroy Research described Vedanta Resources Ltd as a holding company with no major operations of its own, dependent on extracting cash from Vedanta Ltd to meet its obligations.

"Consequently, VRL's actions to meet its short-term obligations directly impair its creditors' long-term ability to recover their principal, a situation that resembles a Ponzi scheme where VEDL stakeholders, which include VRL creditors, are the 'suckers'," it said.

This arrangement, the short seller claimed, has pushed "the entire group to the brink of insolvency, propped up only by a continuous cycle of new debt, accounting tricks, and the deferral of massive, undisclosed liabilities".

"New credit lines serve only to destroy the PropCo's only collateral, staving immediate insolvency at the expense of any chance of creditors recovering principal. The mechanisms used to maintain the illusion of stability are failing, and a group-wide insolvency event is no longer a distant risk," it said.

In another post, Viceroy said, "In lieu of a response: Vedanta simply has outlined details of our legal disclaimer. This is the laziest response to any report we have published in our 8+ year history".

"We stand behind our work, and are happy to take questions," it added. PTI ANZ BAL BAL