United Spirits launches inquiry into accounting issues

United Spirits, which is now controlled by Diageo, said it took a
write-down of Rs4,321.6 crore in the March quarter. Photo: Bloomberg


Mihir Dalal   Mint    4 Sep 2014


United Spirits initiates inquiry to investigate whether the company and its executives had violated rules by lending money to UB Group companies

Bangalore: After thrice postponing its earnings announcement because of accounting-related issues, United Spirits Ltd (USL) has initiated an inquiry to investigate whether the company and its executives had violated rules by lending money to UB Group companies, highlighting the difficulties faced by the company’s parent Diageo Plc in managing its acquisition.

USL, India’s largest liquor company, on Thursday reported its biggest-ever loss of Rs.5,380.1 crore in the March quarter because of one-time writedowns related to sale of its Whyte & Mackay unit and bad debt.

The fourth-quarter earnings, and the report by the company’s auditor BSR and Co. Llp, are the latest indicator of legacy issues faced by USL related to its financial dealings with UB Group airline Kingfisher Airlines Ltd.

Since buying a 25.02% stake in USL from the company and Vijay Mallya-owned UB Group in July last year, Diageo has been cleaning up the company’s finances and tightening corporate governance practices 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.

“It was clear from Day 1 that Diageo would have to clean up United Spirits accounts,” said Shriram Subramanian, managing director of InGovern, a corporate governance research firm. “It’s surprising that they have taken so long in doing it. All these issues, especially the inter-company loans, should’ve been spotted during the due diligence process when Diageo was in talks to buy United Spirits. They’ve been in control at United Spirits for over a year and they should’ve addressed these issues much sooner.”

USL, owner of popular whisky brands such as McDowell’s No. 1 andBagpiper, said on Thursday it would conduct a “detailed and expeditious inquiry” that, among other things, will look at the inter-company loans between USL and UB Group entities that were used to prop up the now defunct Kingfisher Airlines.

The inquiry will also 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. warned.

The inquiry will consider the “role of individuals involved” and “potential non-compliance” with the provisions of the Companies Act, 1956, and other relevant regulations. USL is likely to hire independent advisers for the inquiry.

BSR and Co. has reserved judgement on the issues being addressed by the inquiry until it is over. USL did not say when the inquiry would be completed.

The company said in its quarterly report that debtors, who together owedRs.590.7 crore to USL, claimed that they were owed money by UB Group entities. Some of the debtors, who owed Rs.322.5 crore to USL, warned they won’t repay USL unless the UB Group entities paid them their dues.

The company “does not believe that the parties referred to above are entitled to withhold payment/repayment”, USL said. It also pointed to other matters concerning Kingfisher that are affecting its financial statements.

A creditor who is owed Rs.200 crore by Kingfisher wrote to USL saying his company had certain claims on USL’s assets based on agreements entered into in earlier years.

However, USL pointed out that its board had not approved these agreements, and the creditor backed off.

“...we are unable to conclude whether these instances can be termed as ‘fraud’ and whether there are other instances of a similar nature” until the completion of USL’s inquiry, BSR and Co. said.

Another potential headache for USL and parent Diageo is that Mallya, who is chairman of USL, was declared a wilful defaulter by state-owned United Bank of India earlier this week. The wilful defaulter tag will potentially cut off bank finance for UB Group companies and force him to quit company boards.

Mallya said on Thursday he would challenge United Bank’s decision in a court.

Mallya assured USL’s board that “he will take appropriate steps to ensure that the operations of the company are not impacted”, USL said.

USL took a write-down of Rs.4,321.6 crore in the fourth quarter, of whichRs.3,616 crore was related to the sale of its Whyte & Mackay whisky business. Its earnings were further dented by a provision of Rs.1,012.75 crore that it had to set aside to cover debts that it may not be able to recover.

USL said on 9 May it will sell Whyte & Mackay to the Philippines-basedEmperador Inc. for £430 million (about Rs.4,375 crore). It was forced to do so after British regulators raised concerns in November about the impact of Diageo’s acquisition of USL on whisky prices in the UK.

Total income for the quarter ended 31 March rose 3.84% to Rs.1,943.3 crore. The company has been losing market share to rivals Pernod Ricard andAllied Blenders and Distillers Pvt. Ltd over the past two years, and in the past six months, its market share losses have accelerated.

USL was initially expected to publish its March quarter and full-year results as far back as 16 May, but it said on 15 May that its earnings report would be delayed due to “unavoidable circumstances”.

It then said on 27 May that it would take more time to report its results, partly because of the accounting related to the sale of its Whyte & Mackay whisky business. In August, the audit committee of the company’s board raised issues about its accounting and sought “certain clarifications and information on the draft financial results and related issues” for the fourth quarter of last year.