Diageo will not pay Mallya any more, wants $28 mn back

Diageo Plc has said it will not pay the remaining instalments of the £53 million it had agreed to pay Vijay Mallya as part of a deal for ceding his stake in United Spirits Ltd due to breach of several provisions.

The world's largest liquor company has in fact demanded the return of $28 million it has already paid to Mallya.

As part of the agreement with Mallya last year, Diageo was to pay him $75 million over a five-year period for walking away from United Spirits which it had acquired.

This pact included a five-year global non-compete, non-interference commitment besides termination of Mallya's USL appointment and governance rights. A payment of £28 million was made to Mallya in June last year.

''Owing to various reasons, including breaches of several provisions of the 25 February 2016 agreement by Dr Mallya, Diageo believes that it was not liable to pay the $7 million instalment in February 2017 and considers it very unlikely that it will become liable to pay future instalments in subsequent years,'' the company said in its financial year statement.

''Diageo has demanded from Mallya the repayment of £28 million, which was paid by Diageo and sought compensation from him for various losses incurred by the relevant members of the Diageo group on account of the breaches committed by him,'' the company said.

The losses include $135 million that Diageo had given to Standard Chartered Bank as a conditional guarantee for the liabilities of Watson Ltd, a company affiliated with Mallya. The British liquor company will also claim Mallya's stake in the Force India Formula One team that had been pledged as security for Watson.

The maker of Johnnie Walker scotch and Smirnoff vodka incurred an exceptional operating charge including payment to Mallya over a five-year period in February last year. The company said it has credited the outstanding provision of £23 million back to its income statement.

USL, the maker of McDowell's No 1 and Royal Challenge, has provided for nearly all amounts identified in its inquiries related to Mallya in its financial statements through impairments in value or loss of sale of subsidiaries.

When Diageo acquired control of USL in 2012, it issued a guarantee to Standard Chartered against Watson's debt to release USL stock that was to be acquired as part of the deal. Diageo has the benefit of counter-indemnities from Watson and Mallya with respect to its liabilities under the guarantee.

Mallya has stayed away from India despite being asked to return for questioning over the alleged diversion of loans that haven't been repaid following the collapse of his Kingfisher Airlines.

USL, now the Indian unit of Diageo, filed multiple complaints against Mallya after inquiries uncovered ''improper transactions'' worth Rs1,225.3 crore. USL said Mallya had diverted the funds to nearly half a dozen companies in which he had a direct or indirect interest, mostly located in tax havens.

For Diageo, India accounts for almost 40 per cent of sales volume and 9 per cent of net sales. India is the largest whisky market in the world, selling almost 200 million cases – although of course much of this is molasses-based and wouldn't even qualify as whisky in other countries.

''In India, in spite of a tough external environment for alcohol, we performed well and grew market share,'' said Ivan Menezes, chief executive at Diageo Plc, in the financial statement.

USL's net sales in India rose 2 per cent, largely driven by whisky and scotch, despite the impact of demonetisation and a Supreme Court ruling that banned sales in outlets close to highways.