ED probing forex violations in United Spirits’s Whyte & Mackay deal | Mint
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Business News/ Companies / News/  ED probing forex violations in United Spirits’s Whyte & Mackay deal
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ED probing forex violations in United Spirits’s Whyte & Mackay deal

The ED suspects that the deal, which fell short of the 595 million Vijay Mallya paid in 2007 to acquire Whyte & Mackay, was underpriced

A file photo of Vijay Mallya. Photo: MintPremium
A file photo of Vijay Mallya. Photo: Mint

Mumbai: The Enforcement Directorate (ED) is investigating suspected foreign exchange violations in United Spirits Ltd’s £430 million sale of Whyte & Mackay Ltd in 2014 when Vijay Mallya was its chairman.

The ED suspects that the deal, which fell short of the £595 million Mallya paid in 2007 to acquire Whyte and Mackay, was underpriced, causing India to lose out on forex inflows.

The sale of Whyte & Mackay to the Philippines-based Emperador Inc. was prompted by concerns over the impact Diageo Plc.’s acquisition of United Spirits would have on whisky prices in the UK. The Office of Fair Trading (OFT) in UK was worried that the Diageo-United Spirits combine would gain an unfair dominant position in the UK market, and asked Diageo to sell the Whyte & Mackay brand and related assets.

The ED is investigating the sale under the Foreign Exchange Management Act (FEMA), said a senior ED official on condition of anonymity. “The deal valuation was extremely low even in the context of the OFT order. We have started collecting the relevant data to examine the FEMA violation," the official said.

ED investigates cases involving violations of FEMA and the Prevention of Money Laundering Act (PMLA).

The investigation of the Whyte & Mackay sale adds to the troubles of Mallya who is already being probed under the PMLA for allegedly siphoning off part of a 800 crore loan to his Kingfisher Airlines Ltd to buy properties abroad.

The businessman stepped down as chairman of United Spirits in late February after Diageo agreed to pay him $75 million, and left for the UK on 2 March as Kingfisher Airlines’s creditors closed in on him to recover more than 9,000 crore owed by the grounded airline.

The Serious Fraud Investigation Office (SFIO), which functions under the ministry of corporate affairs, is also looking into the Whyte & Mackay deal, Mint reported in late May.

A UB Group spokesperson declined to comment on the latest probe.

USL spokespersons were not available for comment.

According to another investigating official, the sale of Whyte & Mackay, which in 2014 appeared to be under compulsions placed by the OFT order, may not have been in the interest of United Spirits and its shareholders as a whole.

The sale of Whyte & Mackay involved a significant write-off of loans given to the subsidiary in foreign currency, which needed the approval of the concerned authority, in this case Reserve Bank of India (RBI). The commercial terms of the transaction are prima facie suspicions, said the second investigating official, requesting anonymity.

“In this case, the FEMA violation would not be an apparent violation and would come to light only after an investigation. FEMA violations generally pertain to use of the loan granted for a foreign subsidiary for purposes that were not stated at the time of availing the funds," said J.N. Gupta, founder, Stakeholder Empowerment Services, a proxy advisory firm.

The first ED official said the agency is in the process of collecting data pertaining to the Whyte & Mackay transaction from lenders and other financial institutions.

“RBI has stringent regulations and requirements for write-off of loans, receivables in foreign currency," said Amit Jain, partner (M&As) at BMR and Associates LLP.

“Any write-off of the loans needs an approval from the central bank. In case of write-off of a significantly larger amount, all the commercial aspects such as valuation and financials of the company whose loan is being written off can be put under scrutiny by not just the RBI but also the banker and investigative agencies," added Jain.

The SFIO claims to have discovered that of the £634 million pounds United Spirits borrowed in 2007 to fund the Whyte & Mackay acquisition, around £40 million hadn’t been used, Mint reported on 31 May.

Various government agencies have been attempting to get Mallya back to the country from the UK to question him. The government has already revoked his passport.

The government is trying to have him deported, although the UK has already rejected one deportation request.

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ABOUT THE AUTHOR
Jayshree P Upadhyay
Jayshree heads a team of reporters focussing on legal, regulatory, investigative stories. She has worked for over a decade, reporting on financial scams, legal stories and the intersection of corporate and regulatory issues. She is based in Mumbai and has previously worked with Business Standard, Mint, The Morning Context and Bloomberg TV India.
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Published: 01 Jul 2016, 12:13 AM IST
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