With debt repayments of up to $2 billion due by June, billionaire Anil Agarwal-led Vedanta Resources Ltd (VRL) has approached investors about a strategic stake sale of up to 10% in India-listed Vedanta Ltd (VEDL), according to people familiar with the matter. It's also looking into leveraging the domestic subsidiary's cash flows and upstreaming the borrowed funds — moving them to the parent — through dividend payouts, they said. Vedanta has denied any plans for a stake sale.

According to multiple sources familiar with the development, Vedanta Resources has approached Gulf sovereign wealth funds (SWFs) and alternative asset managers such as Abu Dhabi's Mubadala, ADQ, Bahrain's Investcorp, and Saudi Arabia's Public Investment Fund (PIF) for up to 10% dilution in the company. The International Holding Company (IHC) of Abu Dhabi, led by Sheikh Tahnoon bin Zayed al-Nahyan, has also been approached for a potential investment, they said.

Senior Vedanta Group executives met with IHC executives in Abu Dhabi last week. Most of the SWFs have been lukewarm to the idea thus far, said the people cited above, except IHC that has a higher risk appetite. Last year, IHC invested $2 billion in three Adani Group companies, including the flagship Adani Enterprises.

While investors have been looking for a way to maximise their return on investment, they have been unable to find one.

However, these discussions are in their early stages and may not result in a transaction.

At current market value, a 10% dilution would amount to Rs 10,086 crore ($1.23 billion).

A spokesperson for Vedanta denied any plans to sell stakes.

“We strongly deny approaching any of the funds/sovereign wealth funds to mobilise debt or equity,” he said in response to a detailed email query. “We are well positioned to meet our upcoming debt redemptions. Thus, any talk of Vedanta approaching funds to raise money is mere speculation and has no basis.”

IHC spokesperson Ahmad Ibrahim said, “These are market rumours which we don’t comment on; if anything of this nature, IHC will notify the market as per the governor’s rules and regulations.”

Mubadala, ADQ, Investcorp and PIF didn’t respond to queries. Bloomberg reported on Thursday morning that Agarwal was weighing a 5% stake sale in Vedanta as a last resort.

“Majority of lenders are not comfortable lending directly to VRL given its poor credit quality and have instead proposed to lend to VEDL which has reasonably strong cash flows,” said a person directly aware of the matter.

In October, VEDL shareholders approved a transfer of approximately Rs 12,587 crore from general reserves to retained earnings, and the company can borrow an equivalent amount to pay early dividends to shareholders, according to a second source.

While such a move is technically feasible, it may attract the attention of minority shareholders, according to experts.

“Investors would like to see what is the debt on the books of VEDL and its servicing ability of this debt. The additional debt should not increase the debt-equity ratio of the company to an unsustainable level,” said Shriram Subramanian, founder and MD of proxy advisory firm InGovern Research Services.

VRL has large repayments beginning next month, including $400 million in dollar bonds in April and $500 million in May. It is January 20th, and the bond is maturing. Aside from that, it has $1.1 billion in term debt, $600 million in interest payments, and $450 million in inter-company loans. It has primarily serviced debt through loans and dividends from operating companies such as Vedanta Ltd and the group's cash cow, Hindustan Zinc Ltd (HZL).

“The recent weakness in VEDL stock price is driven in our view by renewed concerns on debt refinancing at the parent entity and the impact on VEDL,” said Varun Ahuja and Pinakin Parekh of JP Morgan. “In our view, as long as VEDL does not take any inter-company transaction with the parent VRL and all the cash flow upstreaming is via dividends, the minority shareholders do benefit from higher dividends.”

Vedanta Ltd shares have fallen 33% in the last year due to concerns about parent VRL's debt liabilities. Vedanta Resources, a former London-listed vehicle, owns 69.69% of Vedanta Ltd through various Agarwal family members and his promoter companies, including Twin Star Holdings, Volcan Investments, and Finsider International Ltd.

On March 21, HZL declared a dividend of Rs 26 per share for the fourth time this fiscal year, an unprecedented feat. With the latest interim dividend of Rs 10,983 crore, the company has declared dividends of Rs 75.5 per share for FY23, totaling Rs 32,000 crore, the highest in its history.

The board of directors of VEDL will meet on March 28 to consider a fifth dividend for fiscal year 23. The move can be interpreted as the company's attempt to divert the proceeds received from HZL as a dividend payout to VRL.

The Vedanta Group's attempt to raise capital by selling its international zinc assets to HZL for nearly $3 billion has stalled. This is in response to the Indian government's opposition, which is the largest minority shareholder in HZL, which was privatised more than two decades ago.

Vedanta Resources reported a $2 billion reduction in net debt in the current fiscal year in a regulatory filing in February. It will continue to deleverage its $7.7 billion net debt over the next two fiscal years.