Vijay Mallya engaged in a losing battle with Diageo; he should just 'bow out gracefully'

A battle is brewing in the boardroom of United Spirits Ltd, where majority shareholder Diageo has asked Vijay Mallya to quit over alleged fund diversion. A veteran of many corporate battles, Mallya has, however, struck a defiant note saying only shareholders have the right to oust him.

As per the agreement between Mallya’s UB group and Diageo during the stake sale, the UK company has to endorse Mallya as chairman of United Spirits as long as the UB group and Mallya hold a stake in the company. So, Mallya contents that Diageo asking him to quit the board amounts to breach of this contractual obligation. Mallya holds 0.1 percent in United Spirits now and Diageo holds 55 percent.

Diageo had in November 2012 agreed to buy a majority stake in United Spirits. As part of the agreement, the UK major was to get 27.4 percent stake as the promoters sell their stake and also issue fresh shares. Diageo was also to launch an open offer for the shareholders to buy an additional 26 percent. However, the company’s first attempt at open offer did not succeed as shareholders were not willing to tender the shares at a lowly Rs 1,440 a share. So it launched another open offer in April 2014 at a price of Rs 3,030 a share. It gained control of United Spirits by increasing the stake to 55 percent by July 2014.

However, troubles started when Diageo launched a forensic audit of United Spirits in September 2014 after its auditors raised questions about suspicious related party transactions between United Spirits and other group companies. The battle has now taken a new turn with the forensic audit by PwC finding irregularities and Diageo asking Mallya to quit.

However, analysts and corporate governance experts are not buying Diageo’s line of argument lock, stock and barrel.

Prabal Basu Roy, ex-group CFO at Polaris and CEO of Diptish Investments and Fund Advisors, quoted in a report in the Mint daily , finds it a little puzzling that the transactions kept happening even after Diageo entered the picture.

“It’s hard to understand why they’ve taken so much time to find out about previous alleged irregularities, especially when the market knew for years that United Spirits was being used to fund Kingfisher,” he has been quoted as saying in the report.

True. One need not be an auditor or accounting expert to know that funds probably flowed seamlessly between Mallya group companies as his Kingfisher Airlines crumbled under heavy financial strain. That the agreement to acquire United Spirits happened in November 2012 raises questions about Diageo’s governance practice as well if the suspicious transactions happened until 2013. Can the company wash  its hands off that easily?

But,  it is to be noted that the internal audit is a step in right direction by Diageo. As a global major, the company is not only bound by Indian laws. So it needs to take measures to clean up its business in all the markets it operates. Remember, the company had decided to exit the Tamil Nadu market in November 2014 by selling stake in its Poonamallee distillery for Rs 125 crore. A report in The Times of India said the decision was taken as the company could not function in markets that could potentially violate anti-graft laws. The exit from Tamil Nadu was also part of Diageo’s clean-up of United Spirits’ business operations.

The decision to  do a forensic audit and an internal enquiry has to be read in the context.

For Mallya, the latest developments promise to be another long drawn corporate battle. But will he succeed in staying as the chairman of the company his father Vittal Mallya founded? Unlikely.

Shriram Subramanian, MD of advisory firm InGovern Research Services, feels Mallya’s resistance is futile. “…He should bow out gracefully,” he has been quoted as saying in a Times of India report .

According to him, Diageo now holds 55 percent stake and can oust him through an ordinary resolution after calling for an emergency shareholder meeting.

“It’s fait accompli in our view,” he has said.

For now, Mallya seems to be engaged in another losing battle.