The decision of Vedanta's promoters to take the firm private by buying out shareholders at Rs 87.50 a share is "opportunistic and the price does not reflect the fundamental value of the equity", Institutional Investor Advisory Services said on Friday.
The promoters will have to offer a significantly higher exit price if the bid is to succeed, it added.
Last week, billionaire Anil Aggarwal-run Vedanta Resources, the London-based holding company, saidit will buy back Vedanta shareholders at Rs 87.50 a share and take the company private.
The offer price was at 9 per cent premium over the previous day's closing price, but since then the stock has rallied and closed at Rs 92.90 on the BSE on Friday.
"The free float market capitalization of Vedanta is around USD 2.2 billion and we expect the parent to shell out significantly more, if the delisting is to go through," the shareholders advisory said in a note.
Attributing the move to go private to promoters' debt repayment pressures, the advisory said, "Vedanta delisting at a floor price of Rs 87.50 is opportunistic. The stock is currently trading close to its 52-week low, which is a steep discount to its historic five-year average as a natural fallout of the current economic environment and the COVID-19 crisis."
"The current market price does not reflect the fundamental value of the equity," it said.
The advisory urged Vedanta directors to properly guide the shareholders and not to shrug their shoulders saying the reverse book building will determine the price.
"As in the past, this announcement too, suggests that minority shareholders are a hinderance to the promoters' ambition," it said.
Independent directors have a fiduciary responsibility to guide shareholders on the delisting bid, it said and pointed out that the independent directors of Essar Energy had in 2014 rejected the promoter Essar Global Funds' bid to delist terming it as opportunistic.
"Independent directors must avoid taking cover from regulation. Delisting guidelines protect the rights of minority shareholders.
"It will be a shame if the board throws these regulations back at shareholders saying since the price is determined by reverse book-building, you decide the price," it said.
The board is meeting on May 18 and it must articulate "whether retail shareholders must vote for delisting and also indicate a price range that reflects the intrinsic value of the stock."
It can be noted the Vedanta group has funded almost all its recent corporate actions using debt. The stake buy in Anglo American and the delisting of Vedanta Resources all resulted increasing debt at the holding company level.
The group, which has an aggregate debt of around USD 17 billion as of March 2020, is facing high repayment pressures. It needs USD 1.9 billion, including USD 670 million bonds due nextJune, to service its debt.
The report also noted that in the past, the group had undertaken deals bypassing shareholder approval to access cash from group companies and specifically cited the USD 125 million loan by one of Cairn India's subsidiaries to a Vedanta subsidiary in 2015.
Sebi's delisting of equity shares regulations of 2009 provide sufficient protection to minority shareholders as it says the votes cast by the public shareholders in favour of the delisting must be at least two times the number of votes against it. If the promoters can control 90 per cent shares at close of the delisting process, then the process is deemed concluded.
The shareholders advisory also called on institutional investors to play their rightful role in protecting their as well as minority shareholders' interests. Mutual funds together owned 10.9 per cent of voting rights as of March 2020.
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