Upping the ante to retain Chairmanship at United Spirits, embattled Vijay Mallya today said majority owner Diageo has “contractual obligations” to support his position, even as the British liquor giant said the contract was valid only if there were no “defaults”.
UK-based Diageo, which has spent nearly USD 3 billion for a controlling stake of about 55 per cent in United Spirits Ltd (USL), said it is looking into its “contractual obligations” towards Mallya and his UB Group, but stopped short of making clear its stand on whether it would vote for his ouster.
Diageo also did not clarify whether there have been any “defaults” by Mallya or the UB Group that can nullify the applicability of its “contractual obligations”.
An emergency meeting of USL shareholders looks likely as Mallya has rejected the board’s call for his resignation, even as the alleged irregularities that took place between 2010 and 2013 came under multi-agency scanner.
The boardroom battle at India’s largest liquor maker took its toll on the USL share price, as also on the stocks of various companies of Mallya-led UB Group. Diageo shares also fell on London Stock Exchange in the UK and on NYSE in the US.
Mallya, who is fighting multiple battles for his various ventures including the ‘wilful defaulter’ charges for loans by long-grounded Kingfisher Airlines, has refused to quit and said he will discuss the issue bilaterally with Diageo.
“Diageo has contractual obligation to support me as a Chairman and director on the USL Board. Today, with their statement, they have confirmed it. I will discuss the issue with Diageo bilaterally,” Mallya told PTI.
On whether he will call a special shareholders’ meet, he said: “Let us not speculate. Why should I tell anyone about future course of action. I will discuss with Diageo.”
Earlier today, Diageo said its contractual obligations to support his presence would not apply in the event of defaults by the Indian businessman and his group firm UB Holdings Ltd.
A full-blow boardroom battle broke out over the weekend after USL said it has “lost confidence” in Mallya after an internal probe and a forensic inquiry by PwC revealed alleged fund diversion to Kingfisher and other UB group entities.
USL said “various improprieties and legal violations” were found in the probe into loans worth Rs 1,337 crore given to UB Group firms and it asked Mallya to quit the board.
USL, the erstwhile flagship firm of the UB Group, has already seen a number of exits from its board and top management, including that of its Executive Director and CFO P A Murali last week, since the probe was launched by Diageo.
The company today appointed Vinod Rao as the Head of Finance and V Ramachandran as the Company Secretary and Compliance Officer.
The UK-based liquor giant had first acquired 25 per cent in USL from Mallya-led UB Group in late 2012, while it bought further shares from non-promoters last year.
In its first reaction, Diageo said in a regulatory filing to the London Stock Exchange that it indeed has “certain contractual obligations to support Mallya continuing as non-executive director and chairman of USL, subject to certain conditions and in the absence of certain defaults.”
The world’s largest spirits maker further said USL has provided “its inquiry report and all related materials to Diageo” with regard to their decision to ask Mallya to quit.
“Diageo notes the recommendation of the USL board and will now consider its position under its agreements with Mallya and United Breweries Holdings Limited (UBHL) in light of the inquiry report and materials provided to it,” it added.
The “internal inquiry” relates to “certain matters referred to in USL’s financial statements and the auditor’s report for its financial year ended March 31, 2014”.
The USL board has also decided that, in the event of Mallya declining to step down, it would recommend to the shareholders of the company the removal of Mallya as a director and as the chairman of the board, Diageo said.
“Mallya has indicated he will not tender his resignation,” it added.
Giving details of the “contractual obligations”, Diageo said it had entered into a Shareholders Agreement with UBHL as part of a transaction announced on November 9, 2012 and which came into effect on July 4, 2013 when Diageo completed the acquisition of its initial 25.02 per cent shareholding in USL.
Diageo later hiked its stake after buying further shares from non-promoter shareholders.
“Under the Shareholders Agreement, the parties agreed to use their respective rights as shareholders such that, among other things, UBHL would be able to nominate one director (who would be Mallya) to the USL board.
“This right of UBHL is subject to it continuing to hold at least 1,307,950 shares in USL and Dr Mallya continuing to control UBHL.
“In certain circumstances where Mallya ceases to control UBHL, Mallya may become entitled to succeed to the right to nominate himself as a director of USL subject to his holding at least 1,307,950 USL shares,” Diageo said.
“Previously, UBHL also had the right to recommend a second, independent, non-executive director as long as it continued to hold at least 6,539,750 shares in USL.
“Following an earlier reduction in the UBHL group’s shareholding in USL, this recommendation right has now fallen away,” Diageo said.
“To give effect to these rights, Diageo is obliged, under the Shareholders Agreement and a separate agreement with Mallya, to support Mallya continuing as non-executive director and chairman of USL.
“These obligations of Diageo are subject to the conditions described above and the absence of certain defaults by UBHL and Mallya,” it added.
According to the latest shareholding pattern as on March 31, 2015, Mallya personally held 12,510 shares (0.01 per cent), UBHL had 42,08,556 shares (2.9 per cent), while a few other UB Group entities such as Mallya Pvt Ltd, Vittal Investments Pvt Ltd and Kingfisher Finvest India Ltd also had small holdings.
Diageo holds 7,96,12,346 shares (54.78 per cent stake) through Relay BV.
USL is also initiating necessary steps for recovery of the diverted funds while the role of individuals would be determined by the authorities concerned to whom the company will report all transactions.
Internal action would be taken against other employees found to be involved in the matter.
“… without making any determination as to fault or culpability, directors noted that they had lost confidence in Vijay Mallya continuing in his role as a director and as chairman and therefore, the Board called upon Mallya to resign forthwith as a director and as the Chairman of the Board and step down from his positions in the company’s subsidiaries,” USL said.