Vijay Mallya probe: UB entities, others under multi-agency scanner

Without fixing individual responsibility for the alleged lapses, USL board resolved it has ‘lost confidence’ in Mallya and therefore it asked him to quit as Chairman and Director.

Vijay Mallya - wilful default case
Wilful default case: A consortium of lenders led by SBI on Wednesday filed an interlocutory application in the DRT seeking Vijay Mallya's arrest, impounding his passport, seizing his assets and claiming the $75 million severance package he signed with British liquor giant Diageo last week. (Photo: Reuters)

As Vijay Mallya fights it out with United Spirits to retain his Chairmanship, the role of some top executives, auditors and promoter entities linked to the UB Group have come under scanner of multiple regulatory agencies for alleged irregularities between 2010 and 2013.

While Mallya has refused to resign, citing ‘certain contractual obligations’ on part of USL’s current owner Diageo to support his position, the UK-based parent is looking into the options available with it on whether to support the board resolution seeking his removal.

Sources said that an emergency shareholders meeting can be called by the company with a resolution to seek Mallya’s eviction, if he continues to resist his ouster by the board.

In the meantime, USL is sending the copies of its inquiry report, including a forensic audit done by PwC, into alleged fund transfer and irregularities with regard to loans advanced to the UB Group entities, to various agencies. The matter relates to the time when Mallya and UB Group were controlling shareholders of the company.

Without fixing individual responsibility for the alleged lapses, USL board resolved it has “lost confidence” in Mallya and therefore it asked him to quit as Chairman and Director.

Besides, USL has also initiated a process to take action internally against other employees responsible for the alleged irregularities.

Markets regulator Sebi has already initiated a probe into the entire matter to look into possible lapses on corporate governance, regulatory disclosures and other fronts. It may soon approach the Corporate Affairs Ministry, the USL management and board of directors, the company’s current and previous auditors, among others, in this matter.

Those under scanner include some top executives who quit recently while some of former independent directors might be approached for details.

The alleged irregularities also relate to possible violations of the Companies Act, which may lead to the Corporate Affairs Ministry separately looking into the matter, while accounting regulator ICAI might also look into the roles of the current and previous auditors.

Concerned over the ongoing boardroom battle and the alleged lapses in the past, the minority shareholders of USL have also approached Sebi.

Diageo has acquired 54.78 per cent stake in USL for about USD 3 billion, making it the controlling stakeholders, while the UB group firms continue to hold nearly 3 per cent stake.

In the event of Diageo deciding to vote in support of Mallya’s removal from USL board, it might also seek declassifying UB Group entities and Mallya (who personally holds 0.01 per cent stake in USL) as promoters.

The non-promoter shareholders own nearly 40 per cent stake in the company, out of which FIIs have more than 24 per cent holding. Besides, mutual funds have 4.13 per cent, while individuals own more than 6 per cent stake.

The major non-promoter shareholders include Morgan Stanley, CLSA, Carmignac and Kotak Mahindra International.

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 on Monday 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.

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