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The Indian government has opposed Hindustan Zinc Ltd's $2.98 billion acquisition of assets from the flagship firm of Vedanta Resources, dealing a blow to billionaire Anil Agarwal's plans to trim down the mining giant's $7.7 billion net debt.

The government, which owns a nearly 30% stake in Hindustan Zinc, is against the miner buying some Africa-based zinc assets from Vedanta Ltd - its top shareholder with a near-65% stake - as it was a "related party transaction".

"We always believe in and operate in perfect manners of corporate governance, so (there is) no deviation on that count," Hindustan Zinc Chief Executive Arun Misra told CNBC-TV18. The company and Vedanta Ltd did not respond to Reuters' request for comment.

The development comes a week after Vedanta Resources said it had slashed net debt by $2 billion in the last 11 months, with plans to cut it further, seeking to allay concerns after S&P Global Ratings raised doubts about the group's financial health.

S&P Global had said Vedanta Resources' ability to meet its financial obligations beyond September would depend on a planned $2 billion fundraising as well as the proposed sale of THL Zinc Ltd, a Vedanta Ltd unit that holds zinc assets in Africa.

That deal, announced on Jan. 19, is now in doubt after the government-nominated directors on Hindustan Zinc's board opposed the acquisition and said in a letter dated Feb. 17 that they would oppose further resolutions.

"Flexibility comes down meaningfully if the deal doesn't go through, and the pressure on Vedanta Resources will rise because of that," said Anupam Gupta, an analyst at brokerage IIFL.

The developments follow a turbulent month at Gautam Adani's eponymous conglomerate, which has seen its group companies' shares crater after a short-seller's report on their improper use of offshore tax havens, stock manipulation and high debt levels - allegations the Adani Group has rejected.

CASH WIPEOUT

The Ministry of Mines, in its letter, urged Hindustan Zinc to "explore other cashless methods" to acquire the assets. The government is looking to sell its entire stake in Hindustan Zinc as part of its efforts to replenish state coffers.

"At current valuations, this deal would wipe out the entire cash on the books at Hindustan Zinc, which is why the government is opposing it," said Heet Vora, an analyst at brokerage JM Financial.

Hindustan Zinc's consolidated gross investments and cash and cash equivalents were 164.82 billion rupees (about $2 billion) as of Dec. 31.

The deal, analysts have said, is unfavourable to Hindustan Zinc's minority shareholders, who have to sign off any board decision on related party deals in a meeting that Hindustan Zinc has to call within three months of announcing the deal.

The company had not yet called for a shareholder meeting but its board would consider the government's position, it said in an exchange filing on Monday.

While miner Vedanta Ltd has been hit by a fall in commodity prices, Vedanta Resources is betting growth will be bolstered by its associate firms' investment in areas like semiconductors, display glass, renewables, optical fibre, and transmission.

Hindustan Zinc's shares have lost nearly 14.5% since the deal was announced a month ago, while Vedanta Ltd'd shares have lost about 5%. Both stocks were little changed on the day. ($1 = 82.7080 Indian rupees)

a did not immediately respond to Reuters requests for comment.