Sebi might ask Diageo to revise USL open offer

The regulator feels that this is not in accordance with takeover norms

The Securities and Exchange Board of India (Sebi) might ask Diageo to revise its open offer with a new price for minority shareholders of United Spirits Limited (USL).

Diageo had made its first offer to public shareholders in 2013. The market regulator, however, feels that this was not in accordance with takeover norms.

The regulator is working on the additional payment plan to minority shareholders of USL as the open offer to them had not factored in the bank guarantee provided by Diageo to Watson Ltd, a subsidiary company.

The new payout would also include the deal amount of $75 million (Rs 515 crore) paid to Vijay Mallya, the former chairman of USL by Diageo, third-party transactions and interest on the unpaid amount as dues to shareholders from 2013.

While the disclosure made by USL over fund diversion worth Rs 1,200 crore to various Mallya-owned entities would be also taken into account for calculating additional payout, said a person in the know.

Sebi was of the view that all financial gains made should be factored into the acquisition price in the interests of the minority shareholders.

An e-mail sent to USL did not elicit any response, but a source in the company said it was cooperating with the regulator.

According to Sebi's (Substantial Acquisition of Shares and Takeovers) regulations 2011, all shareholders will be given equitable treatment and no promoter or shareholder can be paid any extra price, by whatever name it may be called.

For failure to carry out these obligations as well as for non-compliance of provisions of these regulations, regulator can interfere and after, recording its reasons, it can ask an acquirer to come up with a revised open offer.

"Under takeover code, Sebi, of course, can direct an acquirer to make an open offer at a revised offer price for acquiring shares of the target company. However, for determination of such price, litmus test would be to see what incidental or collateral agreements and non-disclosures, are considered equitable and significant for other shareholders," said Sumit Agrawal, founder, Suvan Law Advisors, and a former Sebi official.

In 2013, following a 2012 deal between Diageo Plc and Mallya for buying a majority stake in USL, an open offer was made at Rs 1,440 per share to the shareholders of USL.

According to an agreement between Diageo and the UB group in November 2012, Diageo agreed to acquire a 27.4 per cent stake in United Spirits - partly by acquiring shares directly from the promoter entities of the United Breweries group and partly by way of subscribing to a preferential share issue of United Spirits. The agreement triggered a mandatory open offer from Diageo to acquire additional 26% shares in United Spirits as per the Sebi's takeover norms.

At the same time, Diageo Holdings Netherlands B.V. (DHN), a subsidiary of Diageo has issued a conditional backstop guarantee to Standard Chartered Bank pursuant to a guarantee commitment agreement. The guarantee was in respect of the liabilities of Watson under a $135 million facility from Standard Chartered. The guarantee agreement was entered into as part of the arrangements put in place and announced at closing of the USL transaction on 4 July 2013.

"It has now come in public domain that certain disclosures were not made at the time of open offer in 2013," said J N Gupta, founder,

Stakeholders Empowerment Services, a proxy firm. Real justice would be done if differential price on total shares proposed to be acquired is collected by Sebi as penalty and shareholders being compensated.It will send right signals to all concerned against misleading, improper and incomplete disclosure," he added.

"If the regulator's prima facie findings suggest that the separate payments towards any guarantees, settlements etc. were nothing but a means of reducing the offer price for public shareholders, then an upward revision may be warranted else will become a bad precedent for any future acquisitions, wherein the promoters will have unjust enrichment at the cost of public shareholders, said Tejas Chitlangi, partner, IC Legal.

Earlier this year, Mallya had resigned as chairman and managing director of United Spirits, as part of a deal with the company's new owner, Diageo. Mallya, however, continued to serve on the board of other companies, including UB. Diageo now owns 55 per cent of USL and Mallya had stepped down from the board in February, for a $75 million payoff.

Meanwhile, regulator believed to have also submitted documents pertaining to UB, USL in the matter to Central Bureau of Investigation (CBI). Sources said, that probe agency is coordinating with regulator to identify all transactions made between Mallya its owned firms. CBI had sought all share transactions details from regulator in the matter.