Diageo may have to make another open offer in USL

Sebi is probing role of board of directors of USL in alleged fund diversion findings

British spirits maker Diageo Plc may have to make another open offer to the shareholders of United Spirits (USL). Capital market regulator Securities and Exchange Board of India (Sebi) is of the view that the $75-million severance package paid to Vijay Mallya by Diageo in February last year has resulted in change of ownership at the country’s largest liquor company. Change of control, regardless of the acquisition of shareholding, is one the open-offer triggers under Sebi’s takeover code regulations.

“Payment of $75 million to Vijay Mallya was not part of any agreement made previously between Diageo and Mallya at the time of making open-offer. Prima facie, it appears there is a change in control in USL from joint control of Diageo and Mallya to sole control by Diageo,” Sebi has said in a note to its board. The market regulator, at its board meeting held on January 14, discussed the USL matter in detail from the compliance of the Substantial Acquisitions of Shares and Takeover Regulations (takeover code) point of view. 

Sebi in the note has said the settlement agreement — dated February 25, 2016 — entered between Diageo and Mallya is being “legally examined”.  

The $75-million was paid to Mallya exit USL. Following the payment, Mallya had resigned from his position as chairman and non-executive director of USL and also as director in other group companies. 

J N Gupta, managing director at Stakeholder Empowerment Services and former executive of Sebi, says change of control from joint to sole would warrant an open offer. The open-offer price will be calculated as per Sebi’s pricing formula and would also entail interest payment for the delay, he said.

Interestingly, market regulator Sebi in June 2016 had asked Diageo to revise upwards the price of the initial open offer in 2013, following substantial acquisitions of shares of USL in 2012. Diageo has challenged the Sebi’s notice before the Securities Appellate Tribunal. 

According to Sebi, the Diageo’s open-offer price had not factored in a $135-million bank guarantee Diageo had provided to Mallya-owned Watson during the time of the deal. 

Legal experts say the earlier open offer was made on account of Diageo’s $2.1-billion acquisition for 53 per cent stake of USL. They say after the acquisition, both Mallya and Diageo had ‘joint-control’ of USL. If Sebi establishes last year’s severance package has resulted into sole control in favour of Diageo, it would trigger a fresh open offer, they say.

Quality Review Board review

In what could further trouble for Diageo and Mallya, Sebi has also directed government-constituted Quality Review Board (QRB) to review statutory audit of USL conducted by BSR & Co LLP for the financial years 2013-14, 2014-15 and 2015-16. This is with regard to the Rs 1,880-crore fund diversion disclosed by USL involving Mallya and a few entities connected to him.

Manoj Fadnis, president, Institute of Chartered Accountants of India (ICAI) says the QRB follows a procedure to check the quality of the audit and directs disciplinary actions, if required.

Sebi is also probing the role of the board of directors of USL in the alleged fund diversion findings in USL. 

“Role of independent directors in protecting the interest of shareholders and whether they had separate meetings to discuss the aforesaid issues,” Sebi said in the note, referring to the diversion of funds from USL to United Breweries Group companies from 2010 to 2013.