WTM/SR/CFD-CMD/6/01/2017. Case: In Re: Fund Diversions and/or Improper Transactions in United Spirits Limited and Ors. Vs. Securities and Exchange Board of India

Case NumberWTM/SR/CFD-CMD/6/01/2017
JudgesS. Raman, Whole Time Member
IssueSecurities And Exchange Board Of India Act, 1992 - Sections 11(1), 11(4)(b 11B, 2A(c), 19
Judgement DateJanuary 25, 2017
CourtSecurities and Exchange Board of India


S. Raman, Whole Time Member

Background -

1.1 United Spirits Limited ("USL") is a company incorporated under the Companies Act, 1956, on March 31, 1999, as 'McDowell Spirits Limited'. Subsequently, its name was changed to 'McDowell & Company Limited' and eventually changed to 'United Spirits Limited' on October 17, 2006. The Registered Office of USL is at UB Tower, 24 Vittal Mallya Road, Bangalore-560001. The shares of USL are listed on BSE and the National Stock Exchange of India Limited ("NSE").

1.2 As per information obtained by SEBI from BSE and NSE, the details pertaining to the Board of Directors of USL for the period from April 1, 2010 to March 31, 2015, is as under -

1.3 On July 4, 2013, Relay B. V. [wholly owned subsidiary of Diageo Plc ("Diageo"), a public limited company incorporated in England & Wales] alongwith persons acting in concert, viz. Diageo; Diageo Finance Plc; Diageo Capital Plc and Tanqueray Gordan and Company Limited, acquired 25.02% equity shares of USL.

1.4 During the period from November 28, 2013 to February 4, 2014, Relay B. V. acquired 3.76% equity shares of USL through open market transactions resulting in an increase of its holding from 25.02% to 28.78%. Disclosure in this regard was made to stock exchanges under Regulation 29(2) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 ("Takeover Regulations, 2011") on February 4, 2014. Subsequently, in April 2014, Relay B. V. made a voluntary open offer under the Takeover Regulations, 2011, for acquisition of 26% equity shares of USL from the public shareholders. Post the aforesaid offer, Relay B. V.'s shareholding in USL increased to 54.78%.

1.5 As on December 31, 2015, the shareholding pattern in USL as obtained from the BSE website, is as under -

1.6 The details of the Promoter and Promoter Group shareholding in USL as obtained from the BSE website i.e. 58.77%, is as under -

1.7 During the intervening period, in the Audit Report for the Financial Year 2013-14, BSR & Co. LLP (Statutory Auditor of USL) ("BSR & Co. LLP Report") qualified certain transactions by USL, which are detailed below -

"The company created provisions of ` 649.55 Crores as reported in the Annual Report for Financial Year 2013-14, giving the following explanation for the provisioning in its notes to accounts:

Certain parties who had previously given the required undisputed balance confirmations for the year ended 31 March 2013, claimed in their balance confirmations to the Company for the year ended 31 March 2014 that they have advanced certain amounts to certain alleged UB Group entities, and that the dues owed by such parties to the Company will, to the extent of the amounts owed by such alleged UB Group entities to such parties in respect of such advances, be paid/refunded by such parties to the Company only upon receipt of their dues from such alleged UB Group entities. These dues of such parties to the Company are on account of advances by the Company in the earlier years under agreements for enhancing capacity, obtaining exclusivity and lease deposits in relation to Tie-up Manufacturing Units ("TMUs"); agreements for specific projects; or dues owing to the Company from customers. These dues were duly confirmed by such parties as payable to the Company in such earlier years. However, such parties have now disputed such amounts as mentioned above."

1.8 Pursuant to the aforementioned, USL appointed Pricewaterhouse Coopers, United Kingdom ("PWC-UK") to examine such transactions. PWC-UK submitted its Report ("PWC-UK Report/Initial Inquiry/Initial Inquiry Report") on March 24, 2015, which indicated diversion of funds from USL at the behest of Dr. Vijay Mallya ("Mallya"). As per the PWC-UK Report, a further provision of ` 21.6 Crore was made in the Financial Year 2014-15 and the explanation given in the notes to accounts of the Annual Report (Financial Year 2014-15) was as follows:

"The (Initial) Inquiry Report stated that between 2010 and 2013, funds involved in many of these transactions were diverted from the Company and/or its subsidiaries to certain UB Group companies, including in particular, Kingfisher Airlines Limited ("KFA"). The diverted amounts were included in the provision made by the Company in the financial statements for the previous financial year. The Inquiry also indicated that the manner in which certain transactions were conducted, prima facie, indicates various improprieties and potential violations of provisions, inter alia, of the Companies Act, 1956, and the Listing Agreement signed by the Company with various stock exchanges in India on which its securities are listed. The financial impact of these non-compliances on the Company were estimated by Management to be not material.

During the year ended 31 March 2015, an additional provision of ` 216.0 Million (i.e. ` 21.6 Crores) was made for interest claimed. The Management has determined that in light of these provisions, no additional material adjustments to the financial statements are required on this account.

In connection with the recovery of the funds that were diverted from the Company and/or its subsidiaries, pursuant to the decision of the Board at its meeting held on 25 April 2015, the Company is in the process of initiating steps for recovery against the relevant parties, so as to seek to expeditiously recover the Company's dues from such parties, to the extent possible."

1.9 Upon a consideration of the aforesaid PWC-UK Report, the Board of USL on April 25, 2015, called upon Mallya to voluntarily resign from the said Board and to step down from his position in the subsidiaries of USL. However, Mallya refused to step down from the Board of USL.

1.10 In this regard, it is noted that during the Financial Years 2009-10 to 2015-16, the Auditors of USL were as under -

1.11 On February 25, 2016, Diageo entered into a Settlement Agreement ("Settlement Agreement") with Mallya wherein it agreed to pay USD 75 million as settlement amount to him. In furtherance of such Agreement, Mallya resigned from his position as Chairman and Non-Executive Director of USL. On the same date, USL and Mallya entered into an agreement wherein they agreed to a mutual release in relation to matters arising out of the Initial Inquiry by USL.

1.12 Securities and Exchange Board of India ("SEBI") took cognizance of the public announcement made by USL to BSE on February 26, 2016, regarding 'Resignation of Director and Chairman-Dr. Vijay Mallya'. Thereafter, vide letter dated March 9, 2016, SEBI sought the following information from USL in relation to the examination conducted in the matter of disclosure of financial and other information by USL -

"a. The Agreement entered by USL with Mallya included a provision whereby USL allowed Mallya or a party nominated by him to acquire upto 13 residential properties from USL at a fair market value with a 10% discount applying to the valuation of 3 of the properties in Mumbai, Goa and New Delhi. In this context, USL was advised to provide the following -

i. Explanation as to how USL has ensued compliance with Regulation 23 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 ("Listing Regulations"), before entering into the Agreement containing the aforementioned provisions.

ii. Copy of the comments/Report of the Audit Committee of USL in respect of the above.

b. The announcement inter alia also stated that USL and Mallya agreed to a mutual release in relation to matters arising out of the Initial Inquiry by USL into certain matters referred to in the financial statements for the Financial Year 2013-2014. On perusal of the Annual Report for the Financial Year 2014-2015, it was observed that the internal inquiry initiated by USL revealed various improprieties and legal violations which inter alia include the following -

• The manner in which certain transactions were conducted between 2010 and 2013 resulted in diversions of funds from USL and/or its subsidiaries to certain UB Group companies and in particular KFA.

• An Agreement was signed with an Alleged Claimant for a lien on certain investments of USL to secure an advance by the Alleged Claimant to KFA, was entered into without appropriate Board authorization or approval.

• The findings of the inquiry coupled with the management's assessment of recoverability, an aggregate provisions of ` 6495.5 million (including interest claimed) was made for bad debts during the Financial Year 2013-2014 and an additional provision of ` 216 million was made for interest claimed during the Financial Year 2014-2015.

• Potential violations of provisions of the Companies Act, Equity Listing Agreement, etc.

• Certain transactions undertaken between 2010 and July 2013 and certain accounting entries made in that regard has resulted into showing a lower exposure of USL to United Breweries (Holdings) Limited ("UBHL") than that which actually existed at that time.

Further, from the Annual Report for the Financial Year 2014-2015, it was observed that USL provided a copy of the Inquiry Report of its internal inquiry to its Statutory Auditors for their review, following which, the Audit Committee of USL received a Report under Section 143(12) of the Companies Act, 2013, from the Statutory Auditors. Since the issues related to Corporate Governance Standards followed by USL, it was advised to provide the following information -

i. Comments/Report of the Audit Committee as well as the Board of Directors on each findings of the Inquiry Report;

ii. Comments/Report of the Audit Committee as well as the Board of Directors on each issue raised in the Report received from the Statutory Auditors under Section 143(12) of the Companies Act, 2013;

iii. Steps taken by the Board of USL in detail on the adverse findings emanating from the aforementioned Reports.

iv. Role of Independent Directors in protecting the interest of shareholders and whether they had separate meeting(s) to discuss...

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