Given the due diligence done by Deloitte before UK-based spirits major Diageo acquired Vijay Mallya’s stake in United Spirits Limited (USL), and the fact that a new CEO was hired soon after the first step of the 2013 transaction, USL shareholders were right in asking the company’s management tough questions about why it took so long to discover the alleged funds diversion of Rs 1,225 crore by Vijay Mallya during the period October 2010 to July 2014. The fact that USL had well-known auditors right throughout only makes things worse – Price Waterhouse during 2010-11, Walker Chandiok for the next two years and KPMG associate BSR & Co from 2013-14 – but Diageo has a lot more explaining to do. Based on audit reports and forensics, Diageo had complained about funds being diverted more than a year ago – that is when it asked Mallya to step down – but that didn’t stop it from giving him a handsome 75 million pound sign-off deal prior to his stepping down as chairman. If Diageo was convinced Mallya had indeed diverted funds from the company, it was breaking its fiduciary duty to shareholders by effectively absolving him and not taking the matter to its logical conclusion by way of a police complaint. Had the Mallya episode not spun out of control with the banks and then the government deciding to go after him, it is fair to ask whether USL’s new management would have been content to let the matter die a natural death.
Nor is the issue restricted to Diageo-Mallya since there have been several instances of CEOs being under a cloud but then leaving with a handsome severance package, with no one any the wiser. In that sense, this is the perfect victimless crime since the companies prefer to keep quiet for fear of the hit to their reputation if it is discovered that their CEO was siphoning funds. While that means shareholders and proxy advisory firms have to work that much harder at unearthing corporate malfeasance, the government too has a role to play since, for instance, the same auditors who are meant to safeguard against corporate fraud are clearly unequal to their job. United Spirits is not a Satyam by a long shot but many of the ingredients – of diversion of funds and auditors not able to catch it – are similar.
Which is why, the government would do well to formally begin an inquiry into the diversion of funds to pin responsibility on the auditors – and take action against them as was done in the case of Satyam’s auditors. Such an inquiry will also make clear when it was that Diageo first got proof of the diversion of funds and why it chose to sign a deal giving Mallya a sweet exit option. Were such action to be taken, and concluded quickly, it would act as a deterrent to other companies who choose a golden handshake solution to a legal one when senior executives are believed to be guilty of malfeasance.