In brewing troubles for Diageo, markets regulator Sebi is mulling directing the British liquor giant to make additional payment to United Spirits’ minority shareholders from whom it had acquired shares under an open offer in 2013 to compensate them for some ‘preferential’ treatment to the erstwhile promoter Vijay Mallya.
Diageo contests this demand and plans to file an appeal.
However, the regulatory sources said that Sebi is prima facie of the view that the interest of the minority investors was compromised because of non-disclosure of certain deals including about some loan guarantees that Diageo had entered into with Vijay Mallya while acquiring his controlling stake in United Spirits Ltd (USL).
Years after signing the multi-billion dollar takeover transaction with Mallya, Diageo is facing regulatory troubles on multiple fronts and is also at the loggerheads with the embattled businessman himself despite a USD 75-million sweetheart deal it offered him earlier this year.
While Sebi and various other agencies are already probing Mallya and his various group companies for multiple regulatory lapses and defaults, the market’s regulator sent a further notice to Diageo last month regarding the open offer it had made as part of the original USL transaction in November 2012.
The takeover norms require the acquirer to make an open offer to purchase 26 per cent from the minority shareholders of a listed company at a price at least at par with the same paid to the majority shareholders or the promoters.
The latest notice from Sebi was triggered because of the disclosure of the so-called Watson transaction, under which a Diageo entity had provided guarantee to Watson Ltd, a company affiliated with Mallya.
Diageo Holdings Netherlands BV had issued a conditional backstop guarantee to Standard Chartered Bank pursuant to a guarantee commitment agreement.
“The guarantee was in respect of the liabilities of Watson Ltd (Watson), a company affiliated with Vijay Mallya under a USD 135 million (92 million pounds) facility from Standard Chartered,” Diageo said in a regulatory filing.
Sebi issued a notice to Diageo on June 16, 2016 that if there is any net liability incurred by Diageo on account of the Watson backstop guarantee, such liability would be considered to be part of the price paid for the acquisition of USL shares to Mallya’s UB Group under their share purchase agreement.
In that case, additional equivalent payments would be required to be made to those shareholders (though representing only 0.04 per cent of the shares in USL) who tendered in the open offer made as part of the Original USL Transaction, Sebi has informed Diageo.
On its part, Diageo said it “is clear that the Watson backstop guarantee arrangements were not part of the price paid or agreed to be paid for any USL shares under the Original USL Transaction and therefore believes the decision in the Sebi notice to be misconceived and wrong in law and it is taking steps to appeal it”.