Vijay Mallya deals bring Diageo under Sebi lens

It sent a notice to Diageo last month regarding the open offer it made as part of original USL transaction in November 2012

In brewing troubles for Diageo, markets regulator Sebi is mulling directing the British liquor giant to make additional payment to United Spirits' minority shareholders from whom it had acquired shares under an open offer in 2013 to compensate them for some 'preferential' treatment to the erstwhile promoter Vijay Mallya.

Diageo contests this demand and plans to file an appeal.

However, the regulatory sources said that Sebi is prima facie of the view that the interest of the minority investors was compromised because of non-disclosure of certain deals including about some loan guarantees that Diageo had entered into with Vijay Mallya while acquiring his controlling stake in United Spirits Ltd (USL).

Years after signing the multi-billion dollar takeover transaction with Mallya, Diageo is facing regulatory troubles on multiple fronts and is also at the loggerheads with the embattled businessman himself despite a $75-million sweetheart deal it offered him earlier this year.

While Sebi and various other agencies are already probing Mallya and his various group companies for multiple regulatory lapses and defaults, the market's regulator sent a further notice to Diageo last month regarding the open offer it had made as part of the original USL transaction in November 2012.

The takeover norms require the acquirer to make an open offer to purchase 26 per cent from the minority shareholders of a listed company at a price at least at par with the same paid to the majority shareholders or the promoters.

The latest notice from Sebi was triggered because of the disclosure of the so-called Watson transaction, under which a Diageo entity had provided guarantee to Watson Ltd, a company affiliated with Mallya.

Diageo Holdings Netherlands BV had 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 Ltd (Watson), a company affiliated with Vijay Mallya under a $135 million (92 million pounds) facility from Standard Chartered," Diageo said in a regulatory filing.

Sebi issued a notice to Diageo on June 16, 2016 that if there is any net liability incurred by Diageo on account of the Watson backstop guarantee, such liability would be considered to be part of the price paid for the acquisition of USL shares to Mallya's UB Group under their share purchase agreement.

In that case, additional equivalent payments would be required to be made to those shareholders (though representing only 0.04 per cent of the shares in USL) who tendered in the open offer made as part of the Original USL Transaction, Sebi has informed Diageo.

On its part, Diageo said it "is clear that the Watson backstop guarantee arrangements were not part of the price paid or agreed to be paid for any USL shares under the Original USL Transaction and therefore believes the decision in the Sebi notice to be misconceived and wrong in law and it is taking steps to appeal it".

Diageo further said the company is "unable to assess if the notices or enquiries referred to above will result in enforcement action or, if this were to transpire, to quantify meaningfully the possible loss or range of loss, if any, to which any such action might give rise if determined against Diageo or USL."

Both Diageo and USL have received various notices from Indian regulatory authorities, including the Ministry of Corporate Affairs, Serious Fraud Investigation Office, National Stock Exchange, Income Tax Department, Enforcement Directorate, Securities and Exchange Board of India, Bengaluru police, Central Excise Intelligence and the Institute of Chartered Accountants of India.

Diageo said it is "cooperating fully with the authorities in relation to these matters" and USL has also reported its internal inquiry reports, including those about suspected diversion of funds by the erstwhile promoters, to the relevant authorities.

Diageo and USL had also received notices from Sebi requesting information, which they said have been provided to the regulator.

In its submissions, Diageo has maintained that the Watson backstop guarantee arrangements and the matters relating to Mallya's exit deal in February this year were not subject of any earlier pact with the Indian businessman.

Recently, USL disclosed fund diversions and improper transactions to the tune of Rs 1,225.3 crore (Rs 12.25 billion) involving entities related to Mallya following an additional inquiry which was instituted to plug gaps found in an initial internal probe launched in April 2015.

In May 2013, Diageo became controlling shareholder in USL with 25.02 per cent stake after completion of a Rs 3,134.56 crore (Rs 31.34 billion) open offer.

Mallya, who is in the UK for many months, has been declared as a 'wilful defaulter' by lenders for non-payment of loans worth over Rs 9,000 crore (Rs 90 billion) by his now-defunct Kingfisher.

In February, Mallya struck a 'sweetheart deal' with USL under which he is to get more than Rs 500-crore (Rs 5 billion) payout to leave the company besides being absolved of any 'personal liability' at that time.

With respect to alleged fund diversions from USL, Sebi has already sought help from its counterparts in the US and the UK.

The transactions occurred during the review period covered by the additional inquiry -- from October 2010 to July 2014 -- although certain transactions appear to have been initiated in years prior to the review period, USL had said.