Explained: Why Vedanta shares are up 4% after government's royalty cut on crude oil

Synopsis

Vedanta shares rallied after the Centre reduced royalty rates on crude oil and natural gas production, a move expected to lower costs for the company’s Rajasthan fields and support upstream exploration. Brokerage CLSA said the royalty cut could significantly benefit Vedanta, while investors also await the listing of its demerged entities.

Shares of metal major Vedanta rallied as much as 4% to their day’s high of Rs 310 on the BSE on Tuesday after the Centre reduced royalty rates on the production of crude oil and natural gas from several categories of fields, including deepwater and ultra-deepwater blocks, in a move aimed at boosting domestic exploration and production. The revised rates were notified by the Ministry of Petroleum and Natural Gas on May 8.

But why is Anil Agarwal’s Vedanta a beneficiary? Hong Kong brokerage CLSA said the government has fixed the standard deduction at 15% for all blocks other than nomination blocks. According to the brokerage, this will reduce royalty rates for Vedanta’s Rajasthan fields from 16.67% to 10.6%.

The move is also expected to lower royalty burdens across several other fields, supporting higher exploration and upstream development activity in India. The brokerage added that royalty rates for blocks offered after 2019 under the Hydrocarbon Exploration Licensing Policy (HELP) have been reduced further to encourage fresh investments in the upstream oil and gas sector.

CLSA also highlighted the broader policy signal from the government, especially at a time when crude oil prices are rising, and fiscal pressures remain elevated. The brokerage said the royalty cut suggests the government is focused on encouraging upstream exploration and production rather than increasing taxes on producers.

Vedanta demerger

Mining major Vedanta has recently undergone its much-awaited demerger, with the Vedanta's share price now excluding the value of four of its recently demerged entities, leaving investors waiting for the four new listings to take place on BSE and NSE.

The company in April this year announced that each of its eligible shareholders will get one share of Vedanta Aluminium Metal (VAML), one share of Talwandi Sabo Power (to be renamed to Vedanta Power), one share of Malco Energy (to be renamed to Vedanta Oil and Gas) and one share of Vedanta Iron and Steel, for every share held in Vedanta, marking one of the biggest corporate rejigs in India’s metals and mining space.

During an investor call following the quarterly earnings announcement earlier this month, Vedanta Resources CEO Deshnee Naidoo said that the company will file with stock exchanges next week for listing approval of its demerged entities, with shares expected to list and commence trading by mid-June.

"In the next week, we will be filing with the exchanges for listing approval. The shares of the resulting companies are expected to list and commence trading by mid-June," she said.

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