Vote with caution at EGM, IiAS tells USL shareholders

Institutional Investor Advisory Services India Limited (IiAS) has issued voting advisories against five of 12 special resolutions moved by the United Spirits for shareholders' approval at the forthcoming extraordinary general meeting later this week.

The firm has advised shareholders to vote in favour of seven others.

USL is seeking EGM approval for reporting to the Board for Industrial and Financial Reconstruction (BIFR) on the erosion of net worth to the tune of 52 per cent.

IiAS has advised shareholders to vote in favour of this resolution at the EGM on Friday.

The company reported accumulated losses of to Rs 3,080 crore as on March 31, 2014, which is 52 per cent of its peak net worth (Rs 5,840 crore) during the past four financial years.
 

In accordance with the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985, the company is required to report this to the BIFR and seek an approval from the shareholders at an EGM. USL's accumulated losses emanate from the write-offs on account of the sale of Whyte and Mackay brand, and the write-offs related to loans and advances to UB Group companies, Institutional Investor Advisory Services said.

Though USL registered an operating profit of Rs 310 crore for the fiscal ended March 2014, more than 50 per cent of the peak net worth of the company during the preceding four financial years eroded due to certain provisions made by it towards doubtful receivables, advances and deposits, impairment of the company's investment in its wholly owned overseas subsidiary, USL Holdings Limited in British Virgin Islands, write-off of a part of a certain intra-group loan on account of sale of the entire issued share capital of Whyte and Mackay Group Limited, an erstwhile indirect wholly-owned subsidiary of the company, to a third party. It also had to provide for the diminution in the value of the company's investments in Palmer Investment Group Limited and Montrose International S.A.

The total provisioning for all these factors amounted to Rs 5,330 crore. The company believes that the provisioning was mainly due to exceptional factors and does not reflect upon the long term prospects of the company, IiAS said.

IiAS has also advised shareholders to vote for the resolution moved by the company for approval of sales promotion services agreement dated October 1, 2013, between USL and Diageo India Private Limited (DIPL). Under this agreement, USL will provide sales promotion services to DIPL for some products, in consideration for a sales commission. The maximum value of the transaction has not been mentioned. In FY14, USL received a commission of Rs 16.40 crore from DIPL. IiAS flags this resolution to carry transparency risk since the quantum of the transaction has not been defined.

IiAS has recommended voting against the resolution seeking approval of trademark license agreement dated June 29, 2013 between USL and UBHL. Under this agreement, USL has already paid UBHL Rs 250 crore upfront towards the use of the Pegasus logo. Annual payments over ten years are expected to aggregate another Rs 263 crore, of which Rs 42 crore has been paid in FY14. This agreement was signed on July 4, 2013, less than five days before Diageo became a 25 per cent owner of USL. UBHL had not received any payment from USL regarding the use of the Pegasus logo in FY12 or FY13. There is neither clarity on the need for this license nor the benefits of using the logo.

On the resolution seeking approval of services agreement dated October 1, 2013 between USL and Kingfisher Finvest India Limited (KFIL), the IiAS has advised shareholders to vote against it. KFIL engaged in promotion and sale of media and other form of audio visual presentations. But, the agreement between KFIL and USL is related to property maintenance services. The services agreement was approved by the boar in October 2012 and signed into force on July 3, 2013 once again, one day prior to Diageo acquiring its incremental stake to reach 25 per cent in USL. USL has not paid KFIL for such services.

There is no specified term to this agreement, and it will remain in force till Vijay Mallya remains non-executive director and Chairman of USL. IiAS believes that contracts should not be hinged on the existence of an individual / erstwhile promoter.

The advisory firm has also issued directives for voting against the last three resolutions.