Mallya did not disclose USL loans to UB earlier: Diageo

Diageo spokesperson refutes Mallya's claim that all loan exposures were disclosed to Diageo during the due-diligence process

British liquor major Diageo is facing a lot of flak for its silence on the alleged fund diversion from United Spirits to UB Group entities between 2010 and 2013.  The company in September last year hired PricewaterhouseCoopers for a forensic audit on its accounts, which for one relevant year was done by PwC India itself.

Last Saturday, USL board asked its Chairman Vijay Mallya to quit the board after the PwC forensic team found no clarity on the recovery of loans worth Rs 2,100 crore to UB Group entities.

Here is the email response from a Diageo spokesperson on various charges against Diageo and USL.
 

Was Diageo aware of the fund diversion from USL all these years? Why did it take so long for these issues to be investigated and brought before the board?

The matters, which have come to light from the inquiry, were not previously disclosed to Diageo and they pre-date our transactions to invest in USL. (Diageo acquired USL in November 2012 for $2.1 billion.)

These matters were brought to the attention of the USL board as part of the finalisation of the FY14 accounts of USL. That was the end of the first full accounting year, after Diageo had acquired its initial stake in USL.

The issues were raised when KPMG, the auditor, discovered various discrepancies when it was finalising USL’s 2014 accounts. These issues were mentioned in USL’s notice to the stock exchanges dated September 4, 2014 and outlined in the notes to the published accounts. This led to the USL board directing the USL's MD (Anand Kripalu) to conduct an inquiry, which raised issues between 2010 and 2013.

What part did Diageo play in structuring the UB Holdings Ltd inter-company loans?
 

As part of our due diligence of USL in 2012, we were made aware of the inter-company balances between UBHL and USL, many of which were undocumented. As such, we urged the proper consolidation of the mass of outstanding historical balances into a clear disclosed amount on proper arm's length terms at an appropriate commercial rate of interest (not lower than the minimum lending rate set by the Reserve Bank of India).

We had very limited visibility of the historic balances, their underlying terms (if any) and the interest rates applied to them, despite our requests for such information.  The terms of the loan agreement itself were approved and agreed by the then existing USL board in October 2012, and agreed between USL and UBHL.  

Prior to the completion of our investment on July 4, 2013, USL and UBHL formalised the arrangements relating to such inter-company balances by formally documenting UBHL’s indebtedness in the form of the existing UBHL inter-company loans for an amount of Rs 1,375 crore at an interest rate of 9.5 per cent.

Diageo paid £1.8 billion ($2.74 billion including open offer) for its total shareholding in USL and conducted a four-month due diligence on USL in 2012. Why the loans to UB entities were not found out during the due diligence?

Deloitte LLP provided financial and tax due diligence services. Slaughter and May and Platinum Partners acted as legal advisers to Diageo on the acquisition.  We are comfortable with the level of due diligence taken at the time of our investment. We were given express representations that all of the receivables were recoverable in full.

PwC was an auditor as well as an "independent" investigator of USL accounts. This has led to the charge of a conflict of interest between its two roles by investors associations. What's your take on this?

PwC UK was engaged in September 2014 to investigate, with the assistance of PwC India, a specific set of issues as part of an internal enquiry initiated by the USL board.  This was completely separate, independent and carried out by people not involved in the historic statutory audits of USL performed by Price Waterhouse in India, the last of which was for the year ended March 31, 2011.

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