Mallya-Diageo deal under Sebi scanner

Vijay Mallya walked away from United Spirits (USL) with a $75 million cheque but his woes aren’t over. He quit as its chairman on Thursday but will still have to repay dues to it and face various investigations initiated by the Securities and Exchange Board of India, the Union ministry of corporate affairs (MCA) and the stock exchanges. Even the latest deal has come under Sebi’s scanner. A PTI report quoted regulatory sources as saying that the Diageo-Mallya deal faces an extensive scrutiny by the market regulator, which has begun looking into possible violations of corporate governance and other norms.

The report also said Sebi was scrutinising intricacies of the deal and might soon seek further details from USL, Diageo, Mallya and others. Besides, the regulator is also looking into the trading data for USL shares to check whether there have been any violation of insider trading norms or other irregularities.

The new scrutiny has been launched even as an earlier probe is continuing against Mallya and his UB Group, as also others, with regard to alleged financial irregularities at USL relating to loans advanced to UB firms including for Kingfisher Airlines.

United Spirits will continue pursuing the recovery of about Rs 1,300 crore in loans from United Breweries (Holdings), a firm where Mallya has majority stake and is the chairman, said Abanti Sankaranarayanan, head of corporate relations of USL, on Friday.

Sebi and MCA are conducting independent investigations, based on an internal report of USL that accused him of diverting funds to other group firms, including grounded Kingfisher Airlines. Diageo (USL’s parent company) and USL had ordered forensic investigations into the finances after discovering the diversions.

Also, the Diageo-Mallya transaction has come under fire from shareholder activists. “Diageo/USL had referred the matter to Sebi, MCA and the stock exchanges. Now, they are exonerating Mallya by deciding that there will be no personal liability. As if these regulators have seconded the adjudication job to Diageo or in case the regulators do impose any penalty on Mallya, Diageo would volunteer to pay the penalty. What if there is any criminal liability? Has Diageo estimated this and disclosed to shareholders?” asked proxy advisory entity Stakeholder Empowerment Services (SES).

USL said liabilities before its acquisition by Diageo could not be laid on its head and laid the blame at Mallya’s door. “Like all due-diligence processes of any listed company, that conducted by Diageo before the acquisition did not include a forensic audit. After Diageo acquired its shareholding in July 2013, a forensic audit was sought by the USL board, after the company’s new auditors qualified the accounts,” said Sankaranarayanan.

On Thursday, Diageo and USL said they’d ring-fenced themselves of future liabilities from the deal with Mallya, while committing that they would not pursue civil cases filed against him.

SES says the regulators must call for statements from Diageo and board members, and past and present auditors, to check if Diageo had prior knowledge of agreements and diversion of funds prior to its open offer. “Records of due-diligence and advisory from investment bankers must be called. The wrongdoings of anyone cannot be pardoned by cloaking in “the best interests of all,” it said.

USL said on Friday the deal with Mallya would benefit the company financially on reduced legal costs.

“There will be tangible benefits of Rs 500 crore to USL, with the transaction with Mallya, as well as all civil suits regarding Related Party Transactions being dropped by both sides. Plus, real estate worth Rs 100 crore to Rs 200 crore will come to USL, as we sell around 13 properties to the Mallya company at the market prices,” said Sankaranarayanan.

SES says this agreement raised many queries. “If a fraud was committed or certain improper transactions were committed and the matter is with the regulators, how can there be a mutual release, specially by USL? It is nothing but a related party transaction and the same cannot be given effect to without shareholders’ approval. It cannot be the case of USL that this agreement is in the normal course of business. It is also an indirect method of compensating or performing all related party agreements which were defeated in 2014. As regards the properties, it raises and exposes the malaise in many companies which buy property in the name of the company for exclusive use of promoters. Here, there are at least 13 such properties which were for exclusive use of Mallya. Whether these perquisites were calculated and counted in his remuneration is a question to ask,” it said.