Diageo, parent company of Johnnie Walker which is set to become one of Ecclestone’s global F1 sponsors in 2016, have listed details of a dispute with Vijay Mallya in their 2015 annual report. Further, the global spirits company have now listed the Force India team as an asset of Diageo, valued at around $130m.
Following the acquisition of Mallya’s United Spirits (USL) business, certain questionable inter-company transactions between US and Mallya’s other companies emerged. In April this year, the Diageo controlled USL Board said it has “lost confidence” in Mallya after an internal probe and a forensic inquiry by PwC revealed alleged fund diversion to Kingfisher and other United breweries (UB) group entities. USL said “various improprieties and legal violations” were found in the investigation into loans given to UB Group firms and it asked Mallya to quit the board.
As part of the USL acquisition, Diageo issued a guarantee to Standard Chartered Bank for a $135 million loan they had awarded to Watson Ltd to ensure the release of USL shares that were to be acquired as part of the deal. Watson Ltd were holding as collateral for a loan they had granted to Vijay, shares in another Mallya business – United Breweries – and also shares in Sahara Force India.
Diageo became concerned that Standard Chartered would be unable to collect on the loan back in April this year following a default by Watson Ltd. Further, a number of other Indian banks chasing Mallya and his companies for debts of around $2bn had petitioned the Debt Recovery Tribunal (DRT) in Bengaluru and succeeded in preventing sale or any other transfer of such UBL shares in June as part of the enforcement process pending further orders.
In an attempt to recover their loan to Watson Ltd, Standard Charter took action in June to have this embargo on the assets of Watson Ltd lifted and the court approved their petition. (Details below in Appendix A). As part of the debt transfer procedures since, the Watson held collateral from Mallya – of UBL shares and Force India shares – now sits in Diageo’s balance sheet.
There is a December deadline set for Diageo to be repaid and should this not happen, the Force India shares held currently as collateral may be transferred in full to Diageo.
Diageo have valued the Force India shares in their balance sheet at $130m, however, at present it is unclear as to what percentage of the team’s ownership this represents. Mallya is reported to have paid 90 million Euro’s to Spyker for the team in 2007 and then sold Sahara 42.5% for $100m in October 2011.
This is just one headache for Vijay; he has been declared a ‘wilful defaulter’ by a number of Indian banks, is being investigated by the Indian tax authorities and has already had assets worth millions in India seized as he battles a plethora of legal actions.
The Economic Times reported recently, “Two independent sources with direct knowledge of the development share with ET NOW that Viajy Mallya is in advanced talks with UK-based liquor giant Diageo to smoke the peace pipe and exit United Spirits.”
Appendix: Extracts from Diageo Anuual Report
“Guarantees and related matters As of 30 June 2015, the group has no material guarantees or indemnities in respect of liabilities of third parties with the exception of the following: Diageo Holdings Netherlands B.V. (DHN) has issued a conditional backstop guarantee to Standard Chartered Bank (Standard Chartered) pursuant to a guarantee commitment agreement (the guarantee agreement). The guarantee is in respect of the liabilities of Watson Limited (Watson), a company affiliated with Dr Vijay Mallya, under a $135 million (£81 million) facility from Standard Chartered. The guarantee agreement was entered into as part of the arrangements put in place and announced at closing of the USL transaction on 4 July 2013. DHN’s provision of the guarantee agreement enabled the refinancing of certain existing borrowings of Watson to a third party bank and facilitated the release by that bank of rights over certain USL shares that were to be acquired by Diageo as part of the USL transaction. The facility matured and entered into default in May 2015. Standard Chartered is required to take certain pre-agreed steps to recover from Watson prior to calling on the DHN guarantee. The underlying security package held by Standard Chartered includes shares in United Breweries Limited (UBL) and Watson’s interest in the joint venture that owns the Force India Formula One (F1) team. In June 2015, a consortium of banks led by State Bank of India (SBI) obtained an order from the Debt Recovery Tribunal (DRT) in Bangalore preventing the sale or any other transfer of such UBL shares as part of the enforcement process pending further orders from the DRT. DHN intends to vigorously pursue all options to appeal or lift the DRT order in order to allow for the sale of shares and recovery of outstanding amounts. This order was passed following the filing of a memo by Dr Mallya with the tribunal that he had no objection to it issuing the order in respect of the UBL shares. Diageo believes that the existence of any prior rights or dispute in relation to the UBL shares would be in breach of representations and warranties given to Standard Chartered at the time the security was granted and further believes that Dr Mallya’s filing of the memo with the tribunal and his failure to object to the order for status quo are breaches of his obligations to Standard Chartered.”
Dr Vijay Mallya’s counter claim as documented by Diageo:
“USL internal inquiry and related matters In a notice to the Indian stock exchange dated 4 September 2014, USL announced that its board of directors had directed an inquiry into certain matters referred to in USL’s financial statements and the qualified auditor’s report for the financial year ended 31 March 2014 (the Inquiry). The transactions noted in the Inquiry occurred prior to Diageo gaining significant influence over USL on 4 July 2013 when it completed the transaction to purchase shares in USL to take its aggregate shareholding to 25.02%. USL provided an update on 25 April 2015 in relation to the Inquiry which covered various matters, including certain doubtful receivables, advances and deposits. An additional update was set out in USL’s announcement on 23 July 2015 of its unaudited financial results for its first quarter ended 30 June 2015. As stated by USL in its update, the Inquiry: (a) revealed that funds involved in many of the commercial transactions covered by the Inquiry were diverted from USL and/or its subsidiaries to certain companies in the UBHL group, including in particular Kingfisher Airlines Limited; (b) prima facie revealed that certain accounting entries appear to have been made and certain transactions entered into on behalf of USL appear to have been undertaken in order to show a lower exposure of USL (and its subsidiaries) to UBHL than that which actually existed at the relevant time; and (c) also identified certain additional matters where documents identified raised concerns as to the propriety of certain underlying commercial transactions with counter parties referred to in the notes to USL’s audited accounts for the financial year to 31 March 2014. The inquiry suggests that the manner in which these various transactions were conducted, prima facie, indicates various improprieties and potential violations of provisions, inter alia, of the Indian Companies Act 1956 and the listing agreements signed by USL with various stock exchanges in India on which its securities are listed. USL has recorded provisions in an aggregate amount of INR 6,712 million (approximately £65 million) with respect to (a) above, and in an aggregate amount of INR 2,368 million (approximately £23 million) with respect to (c) above. Diageo believes that these provisions represent the full amount of funds indicated by the Inquiry as having been diverted from USL and its subsidiaries to companies in the UBHL group in respect of such transactions. These amounts were fully provided for in the fair value balance sheet consolidated by Diageo on 2 July 2014. Diageo does not expect any further material financial impact on USL or Diageo’s financial results in connection with such transactions. The USL board stated in its update of 25 April 2015 that it was not in a position to make any final determinations with regard to the position of any individuals involved and therefore directed USL to report the relevant transactions to the authorities as required under applicable law and to provide the inquiry report to USL’s auditors. The USL board also resolved that USL should take the necessary steps to pursue all rights and claims against, and expeditiously recover its dues from, the relevant parties to the extent possible. As announced by USL on 23 July 2015, it is now in the process of initiating steps for recovery against the relevant parties. In light of the above, and without making any determination as to fault or culpability, the USL directors noted in the update of 25 April 2015 that they had lost confidence in Dr Vijay Mallya continuing in his role as a director and as chairman of USL and therefore the USL board called upon Dr Mallya to resign forthwith as a director and as chairman of the board and step down from his positions in USL’s subsidiaries. The board of USL also resolved that, in the event Dr Mallya declined to step down, it would recommend to the shareholders of USL the removal of Dr Mallya as a director and as the chairman of the board. Dr Mallya has indicated he will not tender his resignation. Diageo is the majority shareholder in USL with a 54.78% holding in USL. As previously announced by Diageo, it has certain contractual obligations to support Dr Mallya continuing as nonexecutive director and chairman of USL subject to certain conditions and in the absence of certain defaults. Those matters were agreed on 9 November 2012 as part of a broader shareholders’ agreement and came into effect on 4 July 2013 when Diageo completed the purchase of shares to take its aggregate shareholding in USL to 25.02%. Subsequent to its announcement of 25 April 2015, USL has provided its inquiry report and all related materials to Diageo. As announced by Diageo on 27 April 2015, Diageo has noted the recommendation of the USL board and is considering its position under its agreements with Dr Mallya and UBHL in light of the inquiry report and materials provided to it. Diageo’s consideration of that matter is ongoing and Diageo will continue to review closely developments in respect of USL in this context. USL made provisions in its financial statements for the two years ended 31 March 2014 and 31 March 2015 in respect of the issues identified by the Inquiry. The audit report on the financial statements of USL for the year ended 31 March 2015 was also qualified in respect of the issues. (g) SEC Inquiry Diageo has received an inquiry from the US Securities and Exchange Commission (SEC) regarding its distribution in the United States. Diageo is currently responding to the SEC’s request for information in this matter. Diageo is unable to assess if the inquiry will evolve into a broader information request or an 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. 132 DIAGEO ANNUAL REPORT 2015 FINANCIAL STATEMENTS OF THE GROUP: OTHER FINANCIAL INFORMATION (h) Other The group has extensive international operations and is defendant in a number of legal, customs and tax proceedings incidental to these operations, the outcome of which cannot at present be foreseen. In particular, the group is currently the defendant in various customs proceedings that challenge the declared customs value of products imported by certain Diageo companies. Diageo continues to defend its position vigorously in these proceedings. Save as disclosed above, neither Diageo, nor any member of the Diageo group, is or has been engaged in, nor (so far as Diageo is aware) is there pending or threatened by or against it, any legal or arbitration proceedings which may have a significant effect on the financial position of the Diageo”