Mumbai: Diageo India Pvt. Ltd, the local unit of the world’s largest liquor company by sales, may write off a significantly large amount for the year ended June because of alleged wrongdoing by ex-employees that led to a top-level shake-up, said two persons familiar with the situation.
The misconduct, exposed in March and dating back at least three years, included inventory mismanagement, inflated promotional expenses and other losses related to high-seas sales of liquor stock billed for the Indian market, said the two persons, who didn’t want to be identified. The write-off could amount to as much as Rs100 crore, said one of them.
A high-seas sale refers to the sale of a consignment while it is en route by sea, diverting it to another destination.
Diageo Plc., maker of Johnnie Walker Scotch whisky and Smirnoff vodka, is expected to show the loss in its consolidated earnings, to be released in August. The Indian unit is fully owned by the European spirits maker.
An audit team that is in the process of closing the books for the fiscal year ended 30 June is analysing the loss and other financial aspects of the alleged mismanagement. “There will be more clarity on the charges once the books are closed for the year in three weeks’ time,” said an executive from Diageo India, who didn’t want to be identified. A Diageo India spokesperson said the firm does not comment on allegations and speculation.
Diageo announced key changes in the management of the Indian unit in March, with a group of senior executives including then managing director Asif Adil leaving the company. Diageo appointed its West Asia and North African markets head Roland Abella as the new managing director after the alleged wrongdoing involving some mid-level and senior executives.
Adil declined comment for this story because he has a six-month confidentiality agreement with the company.
Diageo India is in the process of reorganizing its business structure by merging its reserve brands division with its main marketing business in a strategic realignment to cope with the economic slowdown. This has also led to a reshuffle of personnel in the senior and middle management levels. “This reshuffle has also led to (the) exit of some people in the company in recent months,” said the executive cited earlier.
Diageo decided to write off the loss in the course of an investigation that’s continuing, the two persons said.
The probe found that a few senior members of the earlier management team were involved in inflating sales in India by diverting consignments meant for the local market to Dubai and other neighbouring markets. These actions, the investigation found, were for individual monetary benefits as well with an eye on faking sales growth in the local market.
The former employees also inflated expenses on promotional activities, besides selling inventory that was meant for brand promotion in the local market, said one of the two persons Mint spoke with.
Diageo plans to expand in the Indian market—which has grown at around 25% each year from 2003 to 2008—through its own brands in both the spirits and wine segments, as well as partnerships with local distilling and distribution firms.
Diageo has held talks with India’s largest liquor company, United Spirits Ltd, to buy a strategic stake in the company to expand its presence in the country.