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BW Businessworld

Another Satyam In The Making?

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These days, bad times seem to follow the ‘king of good times’ everywhere. Diageo, the new owners of United Spirits (USL), the world’s second-largest spirit maker that Vijay Mallya created, has asked him to resign as USL chairman, following the discovery of financial irregularities at the company.
An internal investigation has unearthed certain doubtful receivables, advances and deposits between 2010 and 2013. The inquiry, directed by the company’s board and conducted by chief executive officer and managing director Anand Kripalu along with the global risk and compliance and legal teams of Diageo, concluded that the funds involved in many doubtful transactions were diverted from USL and/or its subsidiaries to Mallya-led UB Group companies, including Kingfisher Airlines, the failed aviation venture. Mallya had to sell his majority stake in USL to partly pay off the heavy debt and bank loans on the books of the loss-making Kingfisher, which was grounded in 2013.
The USL board also passed a resolution authorising the company to take necessary steps to pursue all rights and claims, and expeditiously recover its dues from the relevant parties to the extent possible.
In the light of the irregularities...“the board called upon Mallya to resign forthwith as a director and as chairman of the board and step down from his positions in the company’s subsidiaries. ln the event Mallya declines to step down, the board also resolved that it would recommend to the USL shareholders the removal of Mallya as a director and as the chairman of the board”, USL has already informed the stock exchanges in April.
Mallya, who owns some 4.09 per cent in USL, has refused to step down, calling these allegations half truths. “Diageo has a contractual obligation to support me as chairman, and it’s only the shareholders who can oust me,” he said. However, the company in which Diageo holds 54.78 per cent is likely to resort to a shareholders’ meeting to ensure Mallya’s ouster.
This boardroom battle stems from a Diageo exercise to clean up USL’s finances. Already, it has led to the exit of P.A. Murali, CFO and a known Mallya sympathiser. More such changes are expected at the top and middle management levels that have many members from the old team.
While this boardroom battle is symptomatic of poor corporate governance issues in many of the listed companies in India — similar to the 2009 Satyam Computer Services scandal — it is also a pointer to the lack of proper due-diligence by Diageo when it acquired a controlling stake in USL. 
Mallya and Diageo are paying for their mistakes. But the ones likely to suffer for no fault of their own are the public shareholders, who hold some 41 per cent in USL. Hope the market watchdog and other regulators are listening.
(This story was published in BW | Businessworld Issue Dated 01-06-2015)