UB Group's investment plan hits FIPB roadblock

Revenue department objects to foreign loans routed through Mallya's mother's firm.

The department of revenue in the finance ministry has raised objections to an application by United Breweries (Holdings) Ltd (UBHL) seeking approval for raising Rs 708 crore by issuing fully convertible equity warrants to FirStart Inc, a company owned by UB group promoter Vijay Mallya’s mother, Lalitha, and headquartered in the British Virgin Islands.

The approval is being sought “ex post-facto”, meaning the deal has been partially concluded.

UBHL plans to use the money from FirStart to invest in various UB Group ventures — which includes Kingfisher Airlines (in which it owns 32.48 per cent), McDowell Holdings (36.17 per cent), Kingfisher Finvest and UB Infrastructure Projects Ltd (both wholly-owned) and UB Electronics (96.25 per cent).

Under the proposal with the Foreign Investment Promotion Board (FIPB), UBHL has asked approval for issuing of 63,87,117 fully convertible equity warrants of Rs 1,110 each to FirStart Inc amounting to Rs 708 crore. Of this 19,71,218 equity warrants worth Rs 218.19 crore has been converted into equity and the rest will be converted later. Once the warrants are fully converted, FirStart Inc will hold 8.97 per cent in UBHL.

Following the revenue department’s objections, FIPB deferred the proposal at its June 19 meeting. A UB Group spokesperson declined to comment.

The revenue department rejected the proposal on three grounds. First, it contends that the foreign direct investment (FDI) in this proposal is primarily a loan given by Nexgen Capital Ltd and Standard Chartered Bank and is being routed through FirStart Inc as an investment in UBHL and, therefore, is not strictly FDI.

Second, Vijay Mallya has extended his India-based funds as a guarantee for the Standard Chartered and Nexgen Capital loans. The department of revenue has argued that if FirStart defaults, the guarantor — in this case Mallya — would have to pay money from funds in India which implies that funds could flow out of the country.

Third, the department has said Mallya’s net worth is less than the amount for which he has given the guarantee and the reason for the gap is not explained.