Diageo, the world’s largest producer of spirits, currently owns about 54.78% of United Spirits Ltd (USL). The Diageo-USL saga commenced all the way back in 2008, when Diageo first registered an interest in USL. Then, in 2012, Diageo first picked up equity stake in the Vijay Mallya-led alcoholic beverage behemoth, and the story goes on. This is what the time-line of the deal looks like:
A few months down the line, a few cracks started to surface. There were murmurs of financial wrong-doings involving USL, United Breweries Holding Ltd. (UBHL) and Kingfisher Airlines Ltd. The new management that was put in place by Diageo, started an inquiry into these suspicions. One of the chief violations that was insinuated, was the possibility of inter-company transactions between USL and the UB group companies, which included the debt-ridden Kingfisher Airlines.
The much-delayed Q4 2014 results, which were announced in September, contained ‘qualifications’ issued by USL’s independent auditors, BSR. ‘Qualified’ financial statements either contain mis-stated values which do not affect the financial statements materially (substantially), or do not contain enough information for the auditors to issue an opinion.
There are 3 major issues that were pointed out by the auditors (as per an article in Livemint by Mihir Dalal):
Corporate mis-governance is a serious threat to the thriving India story, and could definitely hurt investor confidence. Stories such as these reek of operational opacity, a strict no-no for investors.
As far as USL is concerned, the 3 issues high-lighted were only the ones that have been caught by auditors; there could be many more. If the fog lifts, and what we really see is a case of financial fraud, the ramifications could be ominous for the investor community looking at Indian companies. Why? Diageo is by no means a small player; with Revenues of 10.26 bn pounds, and Net Profit of 2.25 bn pounds, they are the world’s largest producer of spirits. If they themselves have issues trying to unravel the murky web of inter-corporate investments in India, the signs don’t bode well for other MNCs or foreign corps looking to pick up stakes in the India story.
Nevertheless, the Board of USL convenes tomorrow, the 30th, to decide whether or not Dr. Vijay Mallya should continue to be a director.
He has already been declared a ‘wilful defaulter’ by the United Bank of India; his continued presence on the Board could prevent USL from accessing any additional funds.
One thing is for sure; Kingfisher, USL, & UBHL have ebeen embroiled in a wicked and convoluted web for some time now, and Diageo seems to have bought its way into it. One can only hope that the mess is cleared out as soon as possible.