United Spirits: Diageo unchained
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Diageo Plc had to pay an arm and a leg to get Vijay Mallya to give up his position of chairman and non-executive director in United Spirits Ltd (USL).
It was in April 2015 that USL informed shareholders that the board had lost confidence in Mallya’s continuation as chairman. This was after an internal inquiry confirmed funds diversion from USL to UB group companies.
But they could not make him go. When Diageo entered as a majority shareholder, it had agreed to keep Mallya as chairman, as long as the UB group held a 1% stake. That smart move on Mallya’s part allowed him to remain chairman till date. The current arrangement breaks the stalemate.
While Diageo is paying money to Mallya and has made certain other concessions, USL has decided to not proceed on the financial irregularities uncovered in the internal inquiry and also made some financial concessions. In turn, UB group entities will terminate old business agreements with USL, freeing it of further financial obligations.
Shareholders may look at this as good riddance. The money was already gone and a long and messy legal battle awaited them if they tried to recover it. The company’s management can instead focus their full energies on running the business. Operationally, nothing will change as Diageo-appointed managers are already running the show. The liquor industry is going through difficult times as it is, with regulatory and policy changes affecting growth. USL reported flat growth in the December quarter in volume terms.
But the stink from this episode won’t go away so soon. News reports indicate that the Securities and Exchange Board of India (Sebi) may probe the current transaction. There are other investigations going on pertaining to these irregularities. There are questions on whether USL did right by settling or whether it should have tried to recover the amounts. It also raises uncomfortable questions about the quality of governance and oversight, even among well-known listed companies, if irregularities of this nature and magnitude come out only when a newcomer replaces the incumbent management.
USL’s share has risen by 20% since 18 February, whereas the announcement was made only on 25 February (a day when the share rose by only 2.4%). The sharp price increase is suspicious. Hopefully, that will be the last of questionable events associated with the company.