Vijay Mallya, chairman of an Indian liquor maker controlled by Diageo Plc, defied a board resolution asking him to quit following an internal enquiry that said he diverted funds to other group companies under his control.
United Spirits Ltd.’s board sought Mallya’s resignation on Saturday, after concluding an internal inquiry into loans and deposits made by the company over a three-year period, India’s biggest spirits maker said in an e-mailed statement. In response, Mallya said he intends to continue as chairman, and that the board’s decision relied on a report based on “half truths and twisted facts.”
United Spirits’ move to eject Mallya, its former owner, marks the culmination of a rocky two years since it was acquired by Diageo. The company delayed fiscal year earnings three times, and said in September it had begun a “detailed and expeditious enquiry” into transactions including a loan of 13 billion rupees ($204 million) to Mallya’s UB Group Holdings entities.
“A full blown investigation needs to take place regarding the intra-group transactions,” Amit Tandon, founder of Institutional Investor Advisory Services, a proxy-advisory firm, said by phone from Mumbai on Sunday. “The chairman should step down, so that an unbiased investigation can take place. He can return to the position if the investigation shows that the accusations are baseless.”
If Mallya exits from the United Spirits board, it may also mark the end of the reign of the flamboyant tycoon, who regularly hosts beach parties and owns stake in a Formula 1 racing team, even after banks declared him a so-called “wilful defaulter” when mounting debts grounded his Kingfisher Airlines Ltd.
Shares of United Spirits have rallied about 20 percent this year, beating the benchmark S&P BSE Sensex that’s little changed during the period. The stock fell 3.3 percent to 3,303.60 rupees at 1:52 p.m. in Mumbai, extending a 4 percent drop on Friday.
“I intend to continue as chairman of USL in the normal manner,” Mallya said in an e-mailed statement. “I have a valid contractual agreement with Diageo Plc which directly addresses my position as director and chairman of USL.”
Foreseeing Mallya’s decision to hold on to his position, the board resolved that it would recommend to shareholders to remove him as a director and chairman, the company’s statement showed. In light of the enquiry’s findings, the board would also request parent Diageo to review its contractual obligations to support Mallya’s chairmanship.
Diageo “will be treating the matter seriously” and will examine the inquiry report and the related materials before reviewing its position under its agreements with Mallya and United Breweries Holdings Ltd., where he is also chairman, the London-based distiller said in an e-mailed response.
Diageo is obliged under the pact signed as part of its United Spirits deal to support Mallya continuing as chairman, subject to conditions and in the absence of certain defaults by him or United Breweries, it said in an earlier statement. If Mallya ceases to control United Breweries, he may gain the right to nominate himself as a United Spirits director if he holds at least 1.3 million shares in the latter, Diageo said.
United Spirits’ board has authorized the company to “pursue all rights and claims against, and expeditiously recover its dues from, the relevant parties to the extent possible,” the company said in its statement. The company’s investigation, headed by Managing Director Anand Kripalu, at first glance appears to indicate “various improprieties and legal violations,” it said.
Mallya, in his response, brought up a report submitted by accounting firm PricewaterhouseCoopers Plc, which he said was the basis of the board’s decision. The report was “severely flawed” and he intends to mount a challenge against its findings, he said.
“PwC made no effort to contact the then USL board members or auditors to verify the position and seek clarity,” Mallya said in his statement. “The inferences and allegations are unjustified and false.”
Diageo had conducted a due diligence process prior to its acquisition of United Spirits, and all these transactions were reported to the London-based company at the time, Mallya said.
“A related question is what recourse do Diageo shareholders have on the audit firm responsible for the due-diligence,” Investor Advisory Services’ Tandon said.