The Firm

Show Timings:

Friday: 10.30 pm, Saturday: 11.30 am

Sunday: 9:30am & 11.00pm

CNBC TV18
Network18

What's Going On At USL? Shouldn't Mallya Step Down?

Published on Fri, Dec 05,2014 | 22:32, Updated at Tue, Dec 09 at 23:00Source : CNBC-TV18 |   Watch Video :

India’s premier spirits company, United Spirits Limited, seems to be suffering a massive hangover! Over the last 6 months USL has written off 4359 crore rupees, eroding its net worth by half. A considerable amount is on account of receivables from Mallya’s holding company. Then last week public shareholders voted down several related party transactions with Mallya entities, overtly expressing their discontent with the company’s ownership and management. Vijay Mallya has been declared wilful defaulter as has his holding company UBHL. And even though he’s contesting the ignominious tag, the consequences are being felt. This week Mallya’s position on the Kingfisher board did not get ministry approval and he also had to step off the board of another group company - MCF. Despite all this – Vijay Mallya continues as the Chairman of United Spirits, all thanks to support from majority shareholder Diageo. So it falls upon us to ask – Isn’t it time Vijay Mallya steps down as Chairman of USL? To answer that I have with me corporate lawyer Sanjay Asher and former SEBI Director & SES Co-Founder JN Gupta.

WHAT'S GOING ON AT USL?
Should Mallya Step Down?

Rs 4359 cr written off
-    Includes receivables from Mallya entities

Public shareholders vote against RPTs with Mallya entities

Vijay Mallya declared Wilful Defaulter
-    MCA rejects his appointment on KFA board
-    Mallya steps down from MCF board

Doshi: The first instance I want to bring up in order to be able to answer my question has to do with the large number of write downs that United Spirits Limited (USL) has taken after having delayed its financial accounts for several months. I won't go through all the write downs; many of them are very suspicious. I want to bring up only two instances, there have been cases of USL debtors – people that owed USL money saying we will not return this money to you because we have loaned money to Mallya entities and till they don’t pay us back we won't pay you back. Some of those debtors in the last two months have miraculously changed their story. However there is still a large amount of money stuck in that instance. The second and most shocking one is to do with a gentlemen or a person or an entity who claims that he gave a loan of Rs 200 crore to Kingfisher Airlines (KFA). He wrote to USL about this and said that this loan one of the basis for this loan was a lien created on some USL investments. Three months or two months after he wrote to USL saying please convert that lien into a pledge he suddenly withdrew his claim and said my lawyers missed some details in an addendum. As USL investigated this story they have come to find out that in fact there was an agreement between KFA and this alleged entity and that agreement did create a lien on some USL investments. The USL board says we never approved any such lien. The USL management says we had no knowledge of any such lien. These are two ugly instances of the kinds of financial transactions that have taken place at USL over the last several months. Would you say that these in themselves are grounds enough for Vijay Mallya to introspect and say this has what has gone on under my regime I should step down?

WHAT'S GOING ON AT USL?

USL debtors that claim they in turn gave loans to UB group entities
Rs 322 cr

USL debtors that claim they in turn gave loans to UB group entities BUT CHANGED THEIR STORY LATER
Rs 333 cr

Total Provisions made in FY14: Rs 649 cr

As per Q1 FY15 unaudited financial results


WHAT'S GOING ON AT USL?

May 5th
Entity claims Rs 200 cr loan given to KFA in 2011/12
Loans given on basis of lien on certain USL investments

July 31st
Entity withdraws claims from USL

Purported agreement shows lien was created on USL investments but released thereafter
-    USL Board says it had not approved any such agreements!
-    USL Management claims it had no knowledge of the agreements!

Gupta: The answer is, legally speaking as of now there is nothing which requires Vijay Mallya to step down. However we are not discussing the legal issues, we are discussing what is right and what is wrong. Ethically, morally and from governance perspective he has no business to continue on the board of USL sitting as a chairman.

We had pointed in our report also that inquiries were going on and USL board ordered inquiry. How can an inquiry be fair and transparent when the person who is inquired against or the company which is inquired against is sitting at the helm of the company? So, we said Vijay Mallya should step down as the chairman at least still such time the inquiries are over, the reports are there.

Now whatever you are pointing out is very simply is that all throughout the company was run as fiefdom of Vijay Mallya as it is evident that neither the board was aware, nor the management was aware as to what is happening or it was a silent board or a board which was not doing any business but just attending the board meeting and not going into details.

So, to me it is a case where it is utter mismanagement and one person’s writ was running large and he was able to do whatever he wanted. He should step down. 

Asher: Why should he step down? He is only a representative of UB Holdings on USL. As far as the loans to KFA is concerned or any of the observations of the auditor are concerned Vijay Mallya was an interested party and therefore he would have refrained from voting at that particular item.

Doshi: What voting are you talking about? If I may reiterate the example I just gave you, there is a lien that is being created on USLs investments in order for an entity to extend a loan to Kingfisher which is a Mallya Group company. USLs management says we didn’t know there was a lien being created on our investments. The board says we never approved anything of this nature. The company has made this disclosure itself in its accounts. How is it that this is alright?

WHAT'S GOING ON AT USL?

May 5th
Entity claims Rs 200 cr loan given to KFA in 2011/12
Loans given on basis of lien on certain USL investments

July 31st
Entity withdraws claims from USL

Purported agreement shows lien was created on USL investments but released thereafter
-    USL Board says it had not approved any such agreements!
-    USL Management claims it had no knowledge of the agreements!

Asher: Granted that the board may not have approved it but the management ….. (Interrupted)

Doshi: The management says it has no knowledge of it. A lien is created on a company's asset, on a company's investment and the company doesn’t know about it.

Asher: This is an observation of an auditor that management had no notice of it.

Doshi: This is the disclosure of United Spirits on the basis of which it says we are going to investigate further. The board has directed a detailed and expeditious inquiry. This is what they found out based on the agreements that they have witnessed or seen.

Asher: Granted, I am only trying to say how can we hold Vijay Mallya responsible for all this?

Gupta: As he is the beneficiary.

Asher: He is not the beneficiary.

Doshi: If it was no Kingfisher and it was some other third unrelated company then may be I would agree with you saying how can you hold Vijay Mallya responsible? This is a loan being given to Kingfisher on the basis of some USL investments as the underlying.

Asher: There may be investments of USL which may be pledged, there may have been lien which would have been created but I am only trying to say here is that how can you hold a individual responsible for the purpose of lien? Why aren’t you not blaming the USL management, why are you not blaming USL board?

Doshi: You are saying the management and the board did all this and Vijay Mallya didn’t know about it. He was the unknowing innocent bystander when one company of his was taking a loan on the basis of investments made by another company of his and that other company says we never knew anything about it?

Asher: I am only saying that we cannot single out Vijay Mallya for this particular observation in the account.

Doshi: I want to bring up then the second instance on the basis of which I have asked this question saying is it time for Vijay Mallya to step down. The second instance is as recent as last week. We saw the public shareholders of USL vote against a variety of related party transactions (RPTs) that were sought to be done between USL and several Mallya entities. I should add here in the spirit of fairness that they also voted against a variety of RPTs to be done with Diageo. Clearly this is a public shareholders of USL telling the management of USL, we don’t approve of what is going on. This is an overt loss of confidence in the management of USL and the board of USL including Vijay Mallya. Should he not step down then?

WHAT’S GOING ON AT USL?
EGM: November 28th
                                                                                     Public Shareholders
                                                                                    AGAINST
Loan agmnt with UBHL                                                      44%
Agmnts with UBHL for purchase of properties              27%
Services agmnt with Kingfisher Finvest                          77%
Advertising agmnt with Watson Ltd                                59%
Sponsorship agmnt with United Racing                         58%
Sponsorship agmnt with United Mohun Bagan            33%
Agmnt with UB Air                                                           77%
Properties call agmnt with PE Data                               75%
Contribution to Vittal Mallya Foundation                      47%



WHAT’S GOING ON AT USL?
Postal Ballot: October 10th

30% public shareholders voted AGAINST these Related Party Transactions
1. Agmnt to manufacture & sell Diageo BV products in India
2. Agmnt to manufacture & sell Diageo North America & Diageo Scotland products in India
3. Distribution agmnt with Diageo BV, Diageo NA & Diageo Scotland
4. Cost sharing agmnt with Diageo India on promotion expenses of Diageo products

Asher: To my mind no. I will give you two reasons for it. One is, Vijay Mallya has been running this business of spirits and alcohol for the last 35-40 years. His father was running it. It is in his blood. He knows how to run this business and he knows he has wealth of experience.

Doshi: It’s in his blood? That’s your defense for…

Asher: Therefore because of his experience why don’t we not have him as the chairman? One single director or a chairman of a company is not going to make any difference but his experience does count.

Secondly as far as RPTs are concerned the shareholders, what experience do they have to know what are the detailed terms and conditions and whether you do with a related party or you do with a rank outsider? Whether it is going to be beneficial to the company or not?

Doshi: I will tell you why. At the EGM there were several resolutions put to vote. The shareholders did not vote on mass against all of them. They voted specifically against those resolutions that had to do with the Mallya entity - an advertising agreement with Watson Limited, a sponsorship agreement with United Racing, a sponsorship agreement with United Mohan Bagan, an agreement with UB Air, these are the things they voted against. They did not vote against everything. They selectively voted against these.

WHAT’S GOING ON AT USL?
EGM: November 28th
                                                                                     Public Shareholders
                                                                                     AGAINST
Loan agmnt with UBHL                                                       44%
Agmnts with UBHL for purchase of properties               27%
Services agmnt with Kingfisher Finvest                           77%
Advertising agmnt with Watson Ltd                                 59%
Sponsorship agmnt with United Racing                          58%
Sponsorship agmnt with United Mohun Bagan             33%
Agmnt with UB Air                                                             77%
Properties call agmnt with PE Data                                 75%
Contribution to Vittal Mallya Foundation                        47%

Asher: They are ignorant about it as to what advantage USL will get.

Gupta: I strongly disagree with all this for the simple reason that you cannot say the shareholders are ignorant.

Doshi: I like this defense, it is the board to blame, the management to blame and ignorant shareholders to blame but Vijay Mallya who is at the centre of all this, whose group companies have been transacting with each other without adequate disclosures or approval he is not to blame at all?

Asher: As long as they are doing it within four corners of law. The auditor has not remarked that it is not within the four corners of law.

Doshi: Can you explain to me how a lien can be created on investments made by USL without USL having knowledge of this lien?

Asher: We don’t know the real facts about it as to who has signed the lien letter?

Doshi: Some unknown entity signs a lien letter to give KFA a loan?

Asher: I am not saying unknown entity. The management now cannot turn it around to say that we did not know. Somebody else has signed a letter. A management person from USL has signed a lien letter.

Doshi: I don’t know who has signed it but I refuse to believe even if I agree with you that Vijay Mallya should not step down I refuse to believe that Vijay Mallya did not know about it because it was his group entity that was benefiting from this transaction.

Asher: May be his group entity was benefiting so what? I am only saying the remark that the management was not aware to my mind is complete non-sense for a simple reason that creating lien requires a signature of some high officer of the company.

Doshi: I wonder who that high officer could be? Are you sure it is not Vijay Mallya? I don’t know, I do not want to make allegations I don’t have a basis on.

Asher: We don’t know. It is a conjecture as to who has signed that lien letter.

Gupta: Sanjay Asher's argument is look the only holy cow in USL was Vijay Mallya and everyone else was out there to squander the money of USL right left and centre to entities benefiting Vijay Mallya. Then he says whether it is right or wrong, whether it is within four walls of the law or not. I read out a comment of auditors - BSR Associates in the last annual report for FY14, the auditors write, "Pending the completion of inquiry as mentioned in paragraph 4 under basis for qualified opinion we are unable to conclude whether these instances can be termed as fraud or whether there are other instances of similar nature." I have yet to see any stronger argument or any stronger observation of auditors.

WHAT'S GOING ON AT USL?
Auditor's Report FY14
'Pending the completion of the inquiry as mentioned…we are unable to conclude whether these instances can be termed as 'fraud' and whether there are other instances of a similar nature'

Asher: To my mind this observation should not have been there by the auditor at all.

Gupta: In the last resolution that they put to vote the company has written, "The Company states that it has developed into an institution with efficient system, competent management practice and stringent operational control processes." Now these two are so contradictory.  

Doshi: The third premise on the basis of which I ask this question, Vijay Mallya has been tagged as wilful defaulter along with some colleagues of his. As of a few days ago his holding company UBHL has also been tagged as a wilful defaulter and this is not necessarily only by one bank but several banks are pointing a finger in his direction. On the basis of which I suppose so he has had to step down from the board of MCF because when he stepped down he offered no explanation. His appointment on the board of Kingfisher Airlines has not received ministry approval either. The ministry has rejected that application. Don’t you think that these external events combined and the fact that the tag of wilful defaulter is not a good one, it could hurt the company whose board you are on because it could restrict that companies access to capital markets etc. Don’t you think that for the sake of USL Vijay Mallya should step down?

WHAT'S GOING ON AT USL?
Should Mallya Step Down?

Rs 4359 cr written off
-    Includes receivables from Mallya entities

Public shareholders vote against RPTs with Mallya entities

Vijay Mallya declared Wilful Defaulter
-    MCA rejects his appointment on KFA board
-    Mallya steps down from MCF board


WHAT'S GOING ON AT USL?

Vijay Mallya declared Wilful Defaulter

USL says
RBI circular 'along with certain covenants in the loan agreements…raise an uncertainty on the impact of this development on the availability of credit facilities to the company'
Satisfied by Mallya's assurance that he 'will take appropriate steps to ensure that the operations of the company are not impacted'

Asher: No. Wilful defaulter under the Reserve Bank of India's (RBIs) master circular who declares them? The lender themselves. It is not an outside agency or a court or a statutory agency which is declaring wilful defaulter. It is a committee of the bank which is declaring, the lenders committee. I would say what sanctity does it have? It has no sanctity at all.

Doshi: That is a fair point. He is disputing it and we have yet to see how that …. (Interrupted)

Asher: Let it be adjudicated. At that point in time one can answer.

Gupta: Couple of questions I have, why we are ready to give Vijay Mallya the long rope. Secondly, in whose interest entire board is working? It is in interest of the entire company and all the shareholders. Vijay Mallya is a minority shareholder today. Why Diageo should be going to that extent of support.

Doshi: When Vijay Mallya was due for a reappointment on the board of USL in October this year, Diageo who is already aware of what all has gone on financially, etc supported his reappointment. In fact I just want to quote what Diageo had to say with regards to its support for Vijay Mallya as chairman, it says that, "UBHL remains entitled under the shareholders agreement to nominate one director to the USL board subject to it continuing to hold at least 1.3 million shares in USL and Vijay Mallya continuing to control UBHL. Diageo contractual obligations to support Vijay Mallya continuing as non-executive director and chairman of USL are subject to these conditions as well as the absence of certain defaults by UBHL or Vijay Mallya." They have sought shelter in a shareholder agreement. My question to you is very simple, may be by the shareholder agreement they need to do what they have done but don’t all these other circumstances warrant a rethink on the part of Diageo?

WHAT’S GOING ON AT USL?
AGM: September 30th

Vijay Mallya’s re-appointment as Director
                                           % of shares voted   FOR     AGAINST
Promoter                                   100%                100%     --
Institutions                                33%                  50.4%   49.6%
Public                                        18%                   91%      9%

WHAT’S GOING ON AT USL?
Diageo: October 1st
‘UBHL remains entitled under the Shareholders Agreement to nominate one director to the USL board subject to it continuing to hold at least 1,307,950 shares in USL and Dr Mallya continuing to control UBHL. Diageo's contractual obligations to support Dr Mallya continuing as non-executive director and chairman of USL are subject to these conditions as well as the absence of certain defaults by UBHL or Dr Mallya’

WHAT’S GOING ON AT USL?
Diageo: October 1st
‘Dr Mallya remains UBHL's nominated director and therefore, in accordance with the terms of the Shareholders Agreement, Diageo voted in favour of the resolution at the USL AGM to re-appoint Dr Mallya as a director of USL’

Gupta: If you read the terms of RPT you find that such terms are nowhere in existence. It says that trademark is owned by this and it is under a contract, USL will be able to use it. But, if at all USL raises the question on the title of the trademark which is being assigned then the whole contract will be cancelled.

WHAT'S GOING ON AT USL?
SES Report
'Couple of transactions (RPTs) have a clause that the underlying contracts are valid till Dr. Mallya is on the Board of the Company. SES raises a fundamental question as to whether transactions are for benefit of Company or for Dr. Mallya. How can Company agree to such terms?'

Doshi: Should these circumstances that we have listed out in the discussion warrant a rethink on the part of Diageo that may be governance is above the shareholder agreement and for the sake of USL they should not vote in favour of Vijay Mallya?

Gupta: In the interest of the company that they should do it. I am surprised that for certain reasons all these RPTs were entered into just one month before the takeover was announced by Diageo. Now the question is at a time of takeover you always do due diligence. If you had done due diligence you would have found and then you would have questioned Vijay Mallya that why this has been done.

WHAT'S GOING ON AT USL?
SES Report

9 RPTs with Mallya entities signed on 11 Oct, 2012
Diageo takeover announcement on 9 Nov, 2012

 

Doshi: Not only would they have done due diligence, they clearly approve of these RPTs otherwise they would have not brought them to vote by shareholders.

Gupta: These transactions are directly or indirectly benefiting Vijay Mallya, some benefits are going personally to him directly. So, my question is this, is this a question for regulator to question the company that was it some sort of a payment to Vijay Mallya which was not into the shareholders knowledge or premium to the acquisition.

Doshi: It is a question you are raising but I don’t know if the answer to that is clear.

Asher: We don’t know all the facts.

Doshi: Many of these RPTs are commercial agreements so to speak. The use of UB Air, it may not be a payment that goes directly into Mallya's pocket, right?

Gupta: How can such agreement be there that this agreement is valid till such time that Vijay Mallya is the chairman? Then is it for the benefit of the company or for Vijay Mallya? How can such an agreement be there?

Doshi: So, some of the RPTs have this in them?

Gupta: Yes that if Vijay Mallya resigns as the chairman, he is no longer chairman then contract is off. What is this?

Doshi: What is more superior, a shareholder agreement that requires Diageo to support Vijay Mallya's chairmanship or the fact that there have been several lapses in governance that require Vijay Mallya to step down?

Asher: Diageo is a matured business organisation. After considering the shareholders agreement and the provisions of law and the governance they would have considered all aspects of it and then they would have come to a decision that let Vijay Mallya continue as the chairman of the company.

Doshi: At no point does it sound that they were happy with it. If you see the press release it says that in accordance with the terms of the shareholder agreement Diageo voted in favour of the resolution to reappoint Vijay Mallya as the director of USL. They are not defending Vijay Mallya, they are just simply saying we are bound by contract to do so.

WHAT'S GOING ON AT USL?
Diageo: October 1st
'Dr Mallya remains UBHL's nominated director and therefore, in accordance with the terms of the Shareholders Agreement, Diageo voted in favour of the resolution at the USL AGM to re-appoint Dr Mallya as a director of USL'

Asher: If they had to say something then they could have also said something adverse about Vijay Mallya. The fact that they have not stated which would mean that they have considered …. (Interrupted)

Doshi: None of my arguments have convinced you that it is time for Vijay Mallya to step down as chairman of USL?

Asher: No, he should continue as the chairman of USL. It is the audit committee which has to look into the RPTs, see whether they are in the interest of the company and its shareholders. The fact that the audit committee has approved it, the board has approved it and the board comprises 50 percent of independent directors, it is the shareholders …. (Interrupted)

Doshi: Many of which have stepped down recently and did not offer themselves up for reappointment and a whole new bunch of independent directors have been appointed now.

Asher: The fact that the new independent directors have accepted the position as independent directors would say that they are comfortable with USL. I am only on the point that these transactions which went to the shareholders were seen or scrutinised by the audit committee and thereafter approved by the board and then only it went to the shareholders. They took a deep dive and they saw that it is in the interest of the company and therefore they put it before the shareholders. Shareholders were blissfully ignorant as to it is in the interest of the company or not.

Doshi: I am not sure that you can call shareholders blissfully ignorant not because I have some great love in my heart for retail shareholders, often they are ignorant or quiet but they have voted definitely against specific RPTs to prove that they were clearly not happy with what was going on at USL?

Gupta: I would request Sanjay Asher to read our report and then he will know that what analysis all of us have pointed out and may be contact some funds which have voted against.

Doshi: You believe that it is time that Vijay Mallya even the law doesn’t require him to step down, steps down as chairman of USL because none of this speaks to well of him?

Gupta: Ethically, morally and from governance perspective he should step down.

Secondly because of the cloud hanging on his image about all these shady transactions and the auditors remarks and all those issues of loan being given not known to the management or to the board, all those things it is time that he should step down.

Doshi: We have two different points of view on whether Vijay Mallya should step down as chairman of USL or not. You can make up your own mind which side do you agree with.

 
Twitter


 
Copyright © e-Eighteen.com Ltd. All rights reserved. Reproduction of news articles, photos, videos or any other content in whole or in part in any form or medium without express written permission of moneycontrol.com is prohibited.