BackUnited Spirits faces inquiries by regulators into accounting
United Spirits has been served notices by the ministry of corporate affairs and the income-tax department regarding its accounting practices
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Bengaluru: The new management of United Spirits Ltd (USL), India’s largest liquor maker, has been forced to spend time and money over the past year looking into suspected accounting irregularities, instead of focusing on efforts to improve its thin margins and arrest a declining market share.
That process is far from over.
USL, controlled by Diageo Plc., said on Wednesday that it had been served notices by the ministry of corporate affairs and the income-tax department regarding its accounting practices, some of which were again questioned by its independent auditor, BSR and Co. Llp.
The maker of McDowell’s No.1 and Bagpiper whiskies made these disclosures as part of its fourth-quarter earnings report in which it showed a net loss of ₹ 1,799.28 crore, partly because it was forced to provide cover for money it is supposed to receive from entities controlled by its embattled chairman Vijay Mallya.
USL, which is in the midst of a boardroom battle, reported exceptional items worth ₹ 1,754.97 crore in the quarter ended 31 March. These included an amount of ₹ 995 crore due as part of a bigger loan given by the company to United Breweries (Holdings) Ltd (UBHL), the holding entity of Mallya’s UB Group.
The USL board on 25 April asked Mallya to resign after an internal probe suggested he may have been involved in financial irregularities. The probe was led by chief executive officer (CEO) Anand Kripalu, who was appointed last year by Diageo, which owns close to 55% of USL. Mallya hit back saying the probe, which was conducted with the help of audit firm PricewaterhouseCoopers (PwC), was “severely flawed" and declined to resign.
“The company has received a notice from the Ministry of Corporate Affairs for an inspection, under 206(5) of the Companies Act, of the books of accounts and other books and papers of the company. A notice under Section 131 of the Income Tax Act, 1961, has also been received. The company is fully cooperating with the authorities in relation to the same," USL said.
Under section 206(5) of the Companies Act, the central government can appoint an inspector to investigate the books of a company. Section 131 of the Income Tax Act allows the revenue authority to conduct inquiries, summon executives and examine the books and documents of a company.
USL is seeking approval from the central government to pay CEO Kripalu and former chief financial officer P.A. Murali, who left the company last month, their remuneration as their salaries exceeded the limits allowed under the Companies Act. Kripalu is due to be paid ₹ 6.5 crore, while Murali’s remuneration stood at ₹ 15.3 crore for the last financial year.
USL auditor BSR again gave a qualified report on the company’s earnings report, noting unaccounted provisions for related party transactions and the pending approval required for salaries of Kripalu and Murali, among other things. USL hasn’t made provisions for unclaimed interest due from UBHL, BSR said.
BSR has qualified all USL earnings reports, starting with the March quarter last year.
The internal probe that suggested fraud at United Spirits was conducted by accounting firm PwC, which was the company’s auditor in at least one of the years when these activities took place. PwC was USL’s auditor for more than five years until August 2011, and it gave a clean chit to the company’s accounts in these years.
USL said on Wednesday that its previous auditors had written to the company to try and “understand the impact of the findings of the inquiry on their respective audit reports". Apart from PwC, USL’s other auditor during the period covered by the probe was Walker Chandiok and Co Llp.
According to USL’s internal probe, the alleged irregularities happened between 2010 and July 2013, when Mallya was chairman and Murali CFO. The board then threatened to go to the shareholders to seek Mallya’s removal. Days later, Diageo said it would review its shareholder agreement with Mallya.
The company started the probe soon after it reported its thrice-delayed fourth-quarter earnings in September. The investigation was prompted by several instances of suspected financial impropriety. Among other issues, the internal inquiry looked at loans extended by USL to the UB Group entities that were used to prop up Mallya’s Kingfisher Airlines Ltd between 2010 and 2013. The airline is now grounded.
USL said the inquiry revealed that the company may have understated the amount owed by UBHL. USL and UBHL entered into an agreement in July 2013 when the companies agreed to convert all loans by USL into a consolidated loan of ₹ 1,337 crore. USL got this agreement cleared by shareholders in January, but the company is now suggesting the amount may be higher.
The Bengaluru-based company said on 25 April that it would report the transactions covered by the probe to the authorities as required under applicable laws, without specifying the regulators.
USL’s March quarter showed that the company continued to lose market share. Sales rose 5.5% to ₹ 2,051.25 crore in the quarter as higher prices offset weak demand. The company has been losing market share to Pernod Ricard India Pvt. Ltd in higher-margin whiskies and to Allied Blenders and Distillers Pvt. Ltd in cheap whiskies over the past four years.
“The restructuring phase is not ending in a hurry," analysts at Societe Generale, a financial services firm, wrote in a research note.
“Gross margin expansion, if any, on the back of premiumisation and efficiencies, needs to be ploughed back into brand investments. Furthermore, competition in the regular whisky segment is becoming fierce and is outweighing the benefits of premiumisation."
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