The boardroom battle at United Spirits (USL), India’s largest liquor maker, is likely to intensify with the regulators and the Centre getting involved, industry watchers say. The company has been in the eye of a storm over the last 10 months, with the management revealing an internal report on fund diversion and three independent directors leaving the board. In coming days, the most debated issue would be the impact on the rights of minority shareholders as the two promoters battle for management control.
Proxy advisory firm Institutional Investors Advisory Services (IiAS) expects some damage. As the conflict unfolds, it says, the impact on minority shareholders will be sooner and harder than they expect.
“It is the concerted failure of governance that is responsible for this tangle. United Spirits’ (USL) board failed in its fiduciary responsibility by allowing USL’s cash flows to be leveraged to support the UB group, whose ambition was to operate a lavish airline. Diageo actions in India suggest a greater focus on closing the USL acquisition, in blatant disregard of corporate governance norms,” IiAS sources said.
Both the NSE and BSE had sought from USL clarifications and a detailed report for public dissemination and filing purposes with the central government or the board as per the Companies Act. But the company said it cannot make the inquiry report public as it contained sensitive commercial and operational information. It also said that it had provided a copy of the report to its statutory auditors for their review and further steps, as may be required.
It is reported that multiple regulators have started gathering information on the alleged irregularities that happened in the company. The Securities and Exchange Board of India (Sebi) and the Institute of Chartered Accountants of India (ICAI) are seeking details to ascertain if violations have been committed. The corporate affairs ministry may also step in as the alleged irregularities amount to violations of various provisions of the Companies Act.
“In relation to the recourse available to USL’s minority shareholders, the companies act, 2013 under section 241 gives them the right to approach the Company Law Board for relief against oppression and mismanagement.
Further, the minority shareholders have the right to move against the statutory auditors if the auditors have failed to report large related party loans during the years in question,” Sherry Oommen, corporate lawyer at Nash Capital Partners, told FE.
Proxy advisory firm Stakeholders Empowerment Services (SES) feels it is not a simple case of Mallya’s resignation or removal. “The matter is far more serious and needs proper and prompt investigation leading to logical end. Both Mallya and Diageo have to answer lots of questions. In order to establish whether fraud has been committed or not, an independent full-fledged forensic audit needs to be conducted. The audit must cover transactions not only with UB group but also subsidiaries and trace final end use of funds especially at W&M (White & Mackay) due to a huge write-off and misstatements in annual reports. If fraud was indeed perpetuated, the guilty need to be brought to books and recovery proceedings start. All those who were aware of the fraud should be not only shown the door but legal proceedings be initiated as per prevailing and applicable laws,” the SES report states.