Institutional Investor Advisory Services (IiAS), a proxy advisory firm, has urged the shareholders of United Spirits to reject a proposal of re-electing the embattled Vijay Mallya as the chairman of United Spirits in the forthcoming AGM scheduled on September 30, 2014.
The proxy advisory firm has said they are advising shareholders of USL to reject this proposal as Mallya is battling being tagged as a wilful defaulter by several banks in connection with their lending to Kingfisher Airlines.
"According to an RBI circular, banks must not extend loans to companies where a director is considered a wilful defaulter. IiAS recognizes that USL is a Diageo subsidiary, and can access funds support from its parent company. However, this is not an optimum way of doing business. IiAS further understands that the decision to declare Vijay Mallya a 'wilful defaulter' is being contested by Kingfisher Airlines and Vijay Mallya. But, until this matter is resolved Vijay Mallya continuing on the board will constrain USL's ability to raise debt from the Indian financial system," the proxy advisory firm said in their advise.
This move by this reputed organisation urging shareholders to stop Mallya from being the chairman will compound the woes for Mallya who is battling as many as 22 cases across various courts in India over defaults to a clutch of state-owned banks and other financial institutions.
In addition to this opposition, IiAS has also opposed a move to hike the remuneration to the Director and CFO of United Spirits - P A Murali, stating that he has to be responsible for various intra-group transactions as a result of which USL is making provisions for bad loans.
"PA Murali is answerable for the intra-group transactions for which USL has taken write-offs and provided for in its 2013-14 financial statement. Given that context, IiAS recommends that PA Murali step down from his directorship on the board," the advisory firm said. USL proposes to revise PA Murali's remuneration from Rs 4.2 crore per annum to Rs 12.8 crore (includes Rs 5 crore paid in FY15 as one-time bonus). For nine months effective 4 July 2013, he was paid remuneration of Rs 4.78 crore.
"The proposed remuneration is not commensurate with the performance of the company, and is significantly higher than industry peers.
Moreover, given that IiAS believes that PA Murali should step down from the board, a discussion on his remuneration is moot," the advisory firm told bluntly.
IiAS has also opposed another resolution to hike the borrowing limit to Rs 10,000 crore stating that it is high and if drawn down, it would allow the company a debt/equity of over 3x. In case the company undertakes more write-off next year, the impact of this borrowing limit will be much higher, IiAS added.
"With the current write-off, USL's net worth has eroded by over 50% - therefore the company will have to report to BIFR. IiAS recognizes that the company is not 'sick' yet, but increasing the leverage at this stage is not advisable. Additionally, USL has decided to reappoint Vijay Mallya. Mallya has been declared a wilful defaulter by several banks. and this constrains the company's ability to refinance its debt, especially from banks," IiAS cautioned shareholders of USL.