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USL: All Written Off?

Published on Fri, Sep 05,2014 | 18:23, Updated at Fri, Sep 05 at 18:23Source : Moneycontrol.com 

By: Sajeet Manghat, Mumbai Bureau Chief, CNBC TV18

The United Spirits Board finally signed off on the balance-sheet for the year 2013-14 after a delay of little over 3 months. The company had violated the listing agreement by failing to publish is fourth quarter and Annual consolidated results within the SEBI stipulated time. USL is yet to publish the  FY 15 first quarter earnings. The Board of USL, which met on 3rd September, made detailed disclosures as part of the FY14 earnings release. The board disclosed that its net worth has eroded by 52% and it will have to file under the Sick Industrial Companies Act. But it believes that this is just a regulatory formality and it by no means reflects the growth potential of the company.

United Spirits posted a full year consolidated loss of Rs 4489 crores on the back of aggressive provisioning undertaken by the company.

The Provisioning

United Spirits made two sets of provisions in the FY 14 balance sheet.

A.    The first set of provisions was primarily on account of a reduction in value of its investments in Whyte & Mackay. USL says net proceeds from the sale of W&M will be insufficient to fully repay the intra USL group loans taken to purchase the company. USL provided for Rs 3616.46 crores towards intra USL Group loans and another Rs 705.17 crores on account of diminution in the value of investments held by its arms Palmer Investment Corp and Montrose International.

The aggregate value of provision amounts to Rs 4321.63 crores. This provision has been categorized as an exceptional item in the consolidated balance-sheet.

B.    The second set of provisions is for doubtful debts/advances and loans. This totals Rs 1123.16 crores which includes Rs 649.55 crores for prior periods.

This set of disclosures is the most disturbing. USL management claims that certain advances and loans provided to some entities and which remained undisputed balance confirmations in FY13 are now being disputed by those entities. The dues in question are on account of advances by the company in the earlier years under agreement for enhancing capacity, obtaining exclusivity and lease deposits in relation to Tie-up Manufacturing Units. These entities now claim that they in turn advanced these amounts to certain UB group entities and will only be able to pay once they receive the payment from those UB group entities. The USL management says, “The claims made in relation to the advances to the parties may indicate that all or some amounts may have been improperly advanced by the company to such parties for, in turn, being advanced to the alleged UB Group entities.”  

This has led to the Board of the company authorizing a detailed inquiry. These advances belong to a period prior to April 1, 2013 and amount to Rs 649.55 crores.  USL says pending completion of the  inquiry, it is not able to determine, whether there would be further impact on the financial statements.

Other Liabilities

1.     USL had granted unsecured loans to UB Holdings Ltd (UBHL) amounting to Rs 1337.40 crores. This was provided under a loan agreement of 8 years with a 6 year moratorium and at an interest rate of 9.5% per annum to be paid at a 6 months interval starting at the end of 18 months from the signing of the loan agreement. USL believes it will be able to recover this loan and hence it has (under) provided for the loan to the extent of Rs 330.32 crores towards principle outstanding. Further it has stopped recognition of interest income of Rs 96.31 crores as a matter of prudence. USL hopes that it will eventually recover the entire Rs 1422.31 crores which includes interest income.

2.     USL has also highlighted that it has come across a case where the lender has brought to the notice of USL Board/management in May this year that certain investments held by the company were subject of lien against a loan of Rs 200 crores that was provided to KFA. The current management after due perusal of the minutes of board meetings didn’t find any mention of these agreements that allowed for providing company assets as lien for loans provided to KFA. The board which was unaware of such agreement, has asked for detailed and expeditious inquiry that would look at existence of any other transactions of a similar nature, the role of individuals and potential non-compliances of provisions of the Companies Act.  The board has further asked the MD & CEO to engage independent advisors and specialists.

Key Auditor Qualifications in the USL FY14 Accounts

1.     With respect to disputed balance confirmations, the auditor feels these claims received in the current year indicate that all or some of these advances may have been improperly advanced from the company to such parties for, in turn, being advanced to certain UB group entities. However, this can be confirmed only after a detailed inquiry.

2.     With respect to the KFA loans, the documents seems to indicate that while the agreements may have sought to create a lien on certain investments of the company, the alleged claimant and KFA sought to negotiate the release of the lien, which was formalized vide second addendum in September 2012.

3.     With respect to the unsecured facilities provided by USL to UBHL the auditor says that given the various uncertainties involved with respect to the litigations involving UBHL and the extended period of repayment of the loans, it is unable to comment on the level of provisions established.

4.     Pending detailed inquiry, the auditors are unable to comment on any further adjustment that could be identified as a result  of the inquiry; its resultant impact on the financial statement and any potential non-compliances with the provisions of the Companies Act 1956 and other regulations.

5.     On account of claims by certain entities, the financial statement of earlier years and consequently the opening balances may be incorrectly stated to that extent. Further the inquiry may result in further adjustments that may have an impact on the opening balances.

6.     It is Unable to comment whether transactions undertaken with certain entities represent transactions under the related party transactions. And whether there exists any other overdue amount of more that Rs 1 lakh in respect of any other loan under the related party transactions.

7.     Rate of interest granted to unsecured loan to UBHL is prima facie prejudicial to the interest of the company. Further it is unable to comment on the regularity in the receipt of principle amount and interest relating to any other loan.

8.     It is unable to comment whether the term loans taken by the company were used for the purpose for which they were raised.

Wilful Defaulters

Subsequent to United Bank declaring Vijay Mallya & KFA as willful defaulter, the board discussed the impact of this decision on the operations of the company. Certain covenants in the loans agreement of the company raise uncertainty on the impact of this development on the availability of credit facilities. The company says Vijay Mallya assured the board that he will take appropriate actions to ensure that there is no impact on the operations of the company. Further, the Board has got comfort from the Controlling Shareholders against any impact that the company may face on account of Vijay Mallya being declared willful defaulter.

The results of the inquiry which could be in the nature of a forensic audit and further provisioning that the company may have to undertake will determine the future of Vijay Mallya & UB Group. The disclosures by USL raises further questions on the management of USL prior to Diageo taking charge of the company. Diageo has already taken a charge in its earnings on account of India and China, and whether it will have to take a further charge will finally determine how long it will be before this emerging market investment earns returns for the company.

 
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