Diageo’s USL may have to restate account

Facing a multi-agency scrutiny, Diageo-owned United Spirits may have to restate its financial accounts, even as some investor groups have begun to question the UK-based parent’s long silence on allegations against the erstwhile main promoters, Vijay Mallya-led UB Group.

In a major boardroom battle, United Spirits Ltd (USL) has demanded ouster of its chairman Mallya, whose UB Group had sold controlling stake in the company to Diageo but remains a promoter entity with little over 4 per cent stake. Diageo, which holds 54.78 per cent stake, is yet to make public its stand on a resolution passed by USL’s board that said it has “lost confidence” in Mallya and therefore it wants him to step down as Chairman and Director. Mallya, on his part, has rejected the demand and said that Diageo has “contractual obligations” to support his continuance as Chairman and Director at USL. While, Diageo has said it is looking into these “contractual obligations”. 

The company will have to go to the shareholders to seek Mallya’s ouster if he continues to reject the board’s demand. While markets watchdog Sebi, accounting regulator ICAI, among others, are looking into the entire case, which also involves allegations of fund diversion from USL to some UB Group companies, including Kingfisher Airlines, between 2010-2013, sources said that USL may have to restate its accounts for the previous years while making provision for the financial transactions under the question. Meanwhile, the minority investors, including FIIs, domestic funds and HNIs who collectively own more than 45 per cent stake in the company, can play a key role in the event of the matter going before the shareholders. The prominent minority shareholders include Morgan Stanley, CLSA, Carmignac and Kotak Mahindra.

While FIIs own more than 24 per cent stake, domestic mutual funds have over 4 per cent and non-institutional domestic investors have nearly 5 per cent. The individuals also have more than 6 per cent stake. Some investor advisory groups have already questioned the role of the past auditors and the silence on the part of Diageo about the entire gamut of alleged irregularities. In their advisory notes to investors, they have raised questions about Diageo, promoters as also about the role of UB Group. In the meantime, multiple regulators have started gathering details about the alleged irregularities that happened between 2010 and 2013. Sources said that the Securities and Exchange Board of India (Sebi) is closely looking into the USL issue and could order the company to restate its financial statements, while the Corporate Affairs Ministry could also step in as the alleged irregularities amount to violations of various provisions of the Companies Act.

Accounting watchdog ICAI had already written to Sebi seeking details to ascertain whether there have been violations committed by erstwhile auditors of USL. The Institute of Chartered Accountants of India (ICAI) has powers to initiate disciplinary action against auditors if they are found to have indulged in malpractices. In September last year, USL board had ordered a probe into the loans given to UB Group companies as it posted a whopping net loss of Rs 4,488.77 crore for the financial year ended March 31, 2014.

The UK-based liquor giant Diageo had first acquired 25 per cent in USL from Mallya-led UB Group in late 2012, while it bought further 26 per cent stake from non-promoters last year. Diageo has spent close to USD 3 billion for the stake. USL has said that its board took the decision for ouster of Mallya following an “inquiry” report submitted by its MD and CEO, which revealed that between 2010 and 2013, funds involved in many transactions were diverted from the company and/or its subsidiaries to certain UB Group companies, including in particular, Kingfisher Airlines Ltd.