Announcement of special dividend by Vedanta group firm Hindustan Zinc (HZL) is credit positive for Vedanta Resources as it will improve the group's liquidity, Moody's Investors Service today said.

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Hindustan Zinc had on Wednesday announced a special dividend of Rs 13,985 crore for 2016-17, taking the aggregate amount paid by it for the fiscal to Rs 27,157 crore, the largest such payout by any company in the country.

HZL's "announcement of a special dividend payment is credit positive for Vedanta Resources Plc... Because it will improve group liquidity and provide the Vedanta group with the flexibility to apply cash towards debt reduction and strengthen its balancesheet", global rating agency said in a statement.

Vedanta Resources subsidiary, Vedanta Ltd will receive Rs 75.4 billion (USD 1.2 billion) of the dividend for its 64.9% shareholding in HZL.

"The special dividend of USD 1.2 billion will cover 68% of Vedanta Ltd's debt maturities in the fiscal year ending March 2018 and alleviate near-term refinancing risk. As for Vedanta Plc, debt maturities of around USD 800 million in 2017-18 will need refinancing," it said.

"Assuming all dividend proceeds are applied to debt reduction, Vedanta Plc's pro forma consolidated leverage at March 2017 will decline to around 3.6x from our earlier estimate of around 3.9x," it said.

"With the inter-company receivables repaid as of January 2017, the avenues for channeling funds to the holding company are increasingly limited," it said.

On March 23, Vedanta Ltd's merger with Cairn India moved a step closer to completion after it received approval from the National Company Law Tribunal. It now requires final approval from the Ministry of Petroleum and Natural Gas.

Once complete, Vedanta Ltd will have access to Cairn India's large cash balance of USD 3.6 billion and its future cash flow.

Fundamentally, the ratings could experience positive pressure if the commodity price improvement is sustained so that the group continues to generate positive free cash flow and further reduces debt levels, thereby improving leverage.