Hindustan Zinc demerger bid faces govt pushback in FY25

Why Hindustan Zinc’s restructuring is back in focus

Hindustan Zinc Ltd (HZL), a Vedanta subsidiary and the world’s largest integrated zinc producer, is again trying to revive its demerger plan amid a strong run in silver prices. The company is also among the top five silver producers globally, and management argues that a separate silver-focused entity could unlock shareholder value. But the proposal faces a familiar hurdle: the central government, HZL’s largest minority shareholder, has not backed the move.

The Centre owns 29.54% in HZL and has made it clear that it is not convinced by the restructuring rationale. With the government also preparing to offload a part of its stake through an offer for sale (OFS) in FY25, it has raised concerns that a demerger could create uncertainty for investors.

What the company wants to do

HZL’s board, in a meeting on September 29, 2023, asked management to explore a corporate restructuring to create separate legal entities for zinc and lead, silver, and the recycling business. The stated objective was value unlocking. After the government signalled discomfort, the company later refined the structure.

People aware of the details said HZL proposed creating two entities, one for zinc and lead and another for silver, while turning the recycling business into a subsidiary. The plan was positioned as a simplified version of the earlier three-entity approach.

However, the mines ministry rejected this revised plan as well, and the company has indicated it will not move ahead without government support.

Why the government’s vote is decisive

HZL needs approval of a “majority of the minority” shareholders to proceed with such a strategic reorganisation. With a 29.54% stake, the Centre effectively holds the key minority vote.

Management has argued that this should not be viewed as government interference in operations. CEO Arun Misra has said the government is exercising its rights as a majority minority shareholder, adding that the government is “not in the business of taking risks,” unlike a private enterprise.

What HZL told the mines ministry

According to people cited in reports, HZL sent a letter to the mines ministry saying it would not push ahead with any demerger proposal the government disapproves of and that it would take the Centre on board while adopting such a plan. One person familiar with the matter said the proposal is likely to be put off, with a formal decision to be taken in due course.

Misra has also said the ministry’s response to the demerger proposal was yet to be discussed in the board along with the company’s observations.

Why the Centre rejected the proposal

The government’s objections have centred on the integrated nature of HZL’s operations. People aware of the discussions said the Centre argued that segregating the businesses could complicate operations without adding value for shareholders.

Another concern flagged by officials and people familiar with the matter is timing. The government has started roadshows to sell its stake and does not want uncertainty around HZL to spook investors ahead of an OFS in FY25.

The Centre has also said it was not convinced by the material presented. Mines Secretary VL Kantha Rao stated that, based on the report in front of the ministry, the government was “not convinced as a shareholder,” and added, “Demerger, anyways, we have not agreed.”

The company’s value-unlocking argument

Misra told Reuters that Hindustan Zinc believes in value creation through a demerger and will continue pursuing it, “disinvestment or no disinvestment.” In response to other media queries, he said the company’s view is backed by a report from a “reputed consultant,” though the consultant was not named.

In another interaction, Misra said that if a separate silver company existed during the current pricing environment, HZL’s market capitalisation of about $10 billion “would have surely become” $14-25 billion, in his view, benefiting all shareholders including the government.

Shareholding structure and the “majority of minority” reality

Vedanta Ltd, controlled by Anil Agarwal, holds 64.92% in HZL. The government holds 29.54%, making it the most important minority shareholder in votes that require minority approval.

This structure has repeatedly shaped strategic outcomes. Earlier, HZL’s attempts to demerge into specialised entities did not materialise because the ministry was not supportive. The government also opposed HZL’s proposal to acquire Vedanta’s international zinc assets in a $1.98 billion cash deal, which would have consolidated the promoter group’s zinc assets under one company.

Disinvestment plans: what the government has said

The government has reiterated its commitment to offload its stake via OFS, but officials have signalled it will be timed with market conditions. Mines Secretary Rao said there was no point doing an OFS when the market is not ready and that the government would test the market through roadshows and then decide.

The Supreme Court in 2021 allowed the government to disinvest its residual stake in HZL in the open market, clearing a key legal pathway for stake sales.

Key facts at a glance

Market impact and what investors should track

The immediate market implication is that the demerger timeline is uncertain because HZL has stated it will not proceed without government support. The government’s stance also reflects a preference for operational continuity, especially ahead of a potential stake sale.

For investors, the key variables are not just the demerger structure but the evidence presented on shareholder benefits. People familiar with the government’s rejection said the proposal lacked sufficient detail on how it would benefit shareholders, and that no alternative restructuring plan was put forward for consideration.

Separately, management’s view links value unlocking to the silver cycle, with the argument that standalone silver exposure could re-rate the business. But the Centre’s position suggests it will require a clearer, more detailed case before supporting any split.

Conclusion

Hindustan Zinc is keeping the demerger proposal alive, but the Centre’s 29.54% minority stake gives it decisive influence under “majority of minority” approval rules. The mines ministry has rejected the plan again, citing the integrated nature of operations and concerns about investor uncertainty ahead of a FY25 OFS.

Next steps will depend on HZL’s board discussion of the ministry’s response and whether the company can address the government’s stated gaps, including a clearer explanation of shareholder benefits and the operational design of any split.