Why Diageo has itself to blame for the USL-Mallya fiasco

Diageo just can't wash its hand of the USL saga, and questions remain about its role as well as its due diligence

‘Good times’ now exist only in the dark alleys of his nostalgia even though Vijay Mallya is trying his best to project an image to the contrary via his well-trimmed televised look during the Royal Challengers Bangalore matches. On Saturday evening, shortly after the United Spirits (USL) board publicly asked him to resign as non-executive chairman, Mallya made it a point to show that he hasn’t lost his fighting spirit, either, in the face of a report that allegedly talked about the murky state of USL’s finances.

Apart from bashing the media (another art he has perfected over the years), Mallya made it clear that he has far better things to do than listen to the USL’s “bogus demand” based on “half- truths and twisted facts”. 

Mallya’s bravado notwithstanding, the chickens seem to be finally coming home to roost. The USL board has made serious charges of financial improprieties between the Indian liquor business and other parts of Mallya’s empire between 2010 and 2012. Similar charges against other companies have invited detailed investigations by several law enforcement agencies and regulators.

The jury is out on whether these charges will stick, though one thing is clear: Mallya should have resigned on his own as USL chairman the day the company’s board initiated inquiry against the suspected transactions. But then, some may argue that such a moral stand has no place in the dictionary of a large section of Indian companies.

The more important point, however, is that Diageo just can’t wash its hand of the sordid saga. Several questions can be raised about the role it has played. The British giant signed the deal with Mallya in 2012 after an on-again, off-again courtship that began in 2008 and it is public knowledge that Diageo had spent months conducting due diligence before buying a controlling stake in USL in July 2013. So Diageo had access to details of all related party transactions made by Mallya’s companies. 

Serious doubts can be raised about the quality of Diageo’s due diligence as USL’s financial results for the quarter immediately after the transaction were repeatedly delayed because of a loan USL had made to one of Mallya’s companies.

There are other question marks as well. In September 2014, proxy advisory firm Institutional Investor Advisory Services India (IiAS) had recommended that shareholders vote against the resolutions for Mallya’s reappointment at USL. But Diageo, which is now making serious charges against Mallya, supported his reappointment in October 2014 despite having doubts about the financial goings-on in USL under his reign.

That brings us to the last point. Diageo said that it supported Mallya because of a “contractual obligation” – that is a shareholder agreement between the two parties. The question that arises is this: Is shareholder agreement above corporate governance?  In that context, the USL board’s current protestations are nothing but doublespeak. And that is precisely what Mallya is banking on now – he wants to “discuss this issue bilaterally with Diageo and not in the public domain”.

What is the compulsion that forced Diageo to suffer Mallya despite having doubts about financial dealings and despite the large number of write downs that USL has taken after having delayed its financial accounts for several months? 

Soon after the takeover deal, Diageo had said that the transaction will transform Diageo. The transformation clearly hasn’t proved to be too good for the British liquor maker.