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Bangalore: Three independent board members at United Spirits Ltd (USL), which has launched an inquiry into its accounting practices, are leaving, putting more pressure on the company’s majority shareholder Diageo Plc to quickly improve corporate governance at India’ largest liquor company.

G.N. Bajpai, Arunkumar Ramanlal Gandhi and Vikram Singh Mehta, all well-known corporate executives, have decided to make themselves unavailable for re-election to USL’s board, the company said in its annual report for the year ended March. All three were also on the audit committee of the board at USL.

As of 3 September, USL had 12 board members, out of which six are independent.

UK-based liquor company Diageo, which first bought a controlling stake in USL in July 2013, appointed former Tata group executive Gandhi and Mehta, a former chief executive officer (CEO) at Shell India, as directors only last year.

USL, the owner of brands such as McDowell’s No.1, Antiquity and Bagpiper whiskies, did not immediately respond to an email seeking comment. Mint couldn’t immediately reach the directors for comment.

“Their resignations show the difficult challenge that the audit committee faces in unravelling the issues of the past, especially the transactions with UB Group companies," said Shriram Subramanian, managing director of InGovern, a corporate governance research firm. “It looks like there’s a certain reputation risk in being on the board of United Spirits. If you’re able to turn around the company, then your reputation will be enhanced. But if things keep getting messier, then your reputation is at risk."

Since buying a 25.02% stake in USL from the company and the Vijay Mallya-owned UB Group in July last year, Diageo has been trying to clean up the company’s finances and improve corporate governance at the firm. Diageo now owns roughly 54.78% of USL after the world’s largest distiller bought an additional 26% of the Indian company’s shares from public shareholders for £1.11 billion two months ago.

Diageo, which has appointed former Cadbury India head Anand Kripalu as USL’s CEO, has been beset by trouble at USL.

On the business side, the company has been losing market share to rivals Pernod Ricard and Allied Blenders and Distillers Pvt. Ltd over the past two years, and in the past six- nine months, its market share losses have accelerated.

On the corporate governance side, USL has faced legacy issues related to its financial dealings with UB Group airline Kingfisher Airlines Ltd.

Renu Sud Karnad, another independent director appointed by Diageo at USL, resigned from the company’s board in February because of a conflict of interest with Karnad’s presence on the board of a lender to the UB Group.

Karnad is the managing director of financial services conglomerate Housing Development Finance Corp. Ltd (HDFC), the promoter of HDFC Bank Ltd. Both HDFC and HDFC Bank are lenders to United Breweries (Holdings) Ltd, the debt-laden holding company of the UB Group.

USL said on 4 September that it had initiated an inquiry to find out whether the company and its executives had violated rules by lending money to UB Group companies, after thrice postponing its earnings announcement because of accounting-related issues.

On the same day, USL reported its biggest-ever loss of 5,380.1 crore in the March quarter because of one-time writedowns related to the sale of its Whyte & Mackay unit and bad debt.

The inquiry will cover some agreements allegedly entered into by USL with a Kingfisher creditor and certain claims made by USL debtors, some of whom are now refusing to repay the company.

The inquiry may have an impact on its financial statements, USL’s independent auditor BSR and Co. has warned.

Another potential headache for USL and parent Diageo is that Mallya, who is the company’s chairman, was declared a wilful defaulter by state-owned United Bank of India last week. The tag will potentially cut off bank finance for UB Group companies and force him to quit company boards. Mallya said last week he would challenge United Bank’s decision in a court.

Mallya is seeking reappointment as a director on USL’s board. The company has also nominated Indu Shahani, a veteran education professional, as an independent director for five years starting 30 September.

USL is scheduled to hold its annual general meeting of shareholders on 30 September.

Shares of the company closed up 0.68% at 2,288.70 on Tuesday on BSE as the benchmark Sensex fell 0.2% to 27,265.32 points.

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