USL to declare sick, refers to BIFR due to net worth erosion by 86%

The accumulated losses of the company as on March 31, is Rs 5,045 cr, greater than 50% of the peak net worth of the previous four financial years

The board of Diageo-controlled United Spirits Ltd will seek shareholders nod to declare sick and refer itself to the Board of Industrial and Financial Reconstruction (BIFR). This, after its net worth eroded by over half due to losses caused by fund diversions to defunct Kingfisher Airlines Ltd by its chairman Vijay Mallya.

USL stock on Tuesday was down by 2.69% or Rs 82.40 to close at Rs 2,982.45 taking its market capitalisation to Rs 43,300 crore. Typically, companies that declare sick not only have their net worth eroded but also their market capitalisation would significantly lower.

"There seems to be a contradiction. You see companies with penny stocks that are referred to BIFR," said Shriram Subramanian, founder and managing director of InGovern Research Services, a proxy advisory firm. "We need to understand what is going on Diageo's mind. Is it to put pressure on Vijay Mallya?"

USL, in a notification to the Bombay Stock Exchange, said the accumulated losses of the company as on March 31, is Rs 5,045.45 crore, greater than 50% of the peak net worth of the previous four financial years that is Rs 5,859.62 crores. The notification said the accumulated losses had increaed to 86.3 per cent by March. USL said that it has made provision of Rs 2,082 crore due to losses and doubtful debts during last fiscal.

The Bengaluru-based liquor firm, which owns brands such as Signature, Antiquity and Black Dog, had in October last year declared to BIFR that its net worth had eroded by over half. An EGM was to be convened then to discuss recommending to the sick company restructuring agency.

USL has reported that financial irregularities and fund diversion when Mallya ran the company has cost USL over Rs 7,200 crore. The USL board has recommended to Diageo to evict Mallya from the company, while the UB Group chairman in November had hinted of his exit after he turned 60.

Mallya, who has said that his priority is to settle Kingfisher dues, has 3.76% shares in United Spirits, of which almost 2.21% is pledged with banks. The moment his shareholding drops to below 1%, his exit from the company will be sealed.