Diageo may have to write off loan to Mallya firm

Diageo has said it may not be able to fully recover a loan of $135 million given to Vijay Mallya-affiliated Watson by Standard Chartered Bank where it had acted as a guarantor in case it is asked to pay up.

Diageo, tthe world's largest spirits maker, which acquired control of United Spirits Ltd (USL) in 2012, had issued a guarantee to Standard Chartered Bank for a $135 million (around Rs900 crore) loan to Watson to release certain USL shares that were to be acquired as part of the deal.

The company said the risk had arisen due to default by Watson in May and Debt Recovery Tribunal (DRT) in Bengaluru preventing sale or any other transfer of such UBL shares in June as part of the enforcement process pending further orders following petition by a consortium of banks led by State Bank of India.

''Standard Chartered is required to take certain pre-agreed steps to recover from Watson prior to calling on the Diageo Holdings Netherlands BV (DHN) guarantee ... in the event that DHN makes any payment under the guarantee, DHN would intend to pursue claims under these indemnities to seek to recover any outstanding amount,'' Diageo said in its annual report of 2015.

The company said the underlying security held by Standard Chartered included shares in UBL and Watson's interest in a venture that owns the Force India Formula One team.

"Under the terms of the guarantee, there are arrangements to pass on to DHN the benefit of the security package if it makes a payment under the guarantee of all amounts owed to Standard Chartered," it added.

However, in June 2015, a consortium of banks led by the SBI obtained an order from the tribunal blocking the sale or transfer of UBL shares to Diageo.

Flagging concerns that the company may not fully recover the amount, Diageo said, "In light of the litigation risk associated with the UBL shares and the potential loss of realisable value of the F1 security during enforcement, Diageo believes that the outstanding amount may not be fully recoverable."

Mallya has been battling a number of cases, including against banks over a 'willful defaulter' tag related to loan defaults by the now-defunct Kingfisher Airlines.

Earlier this year, a 17-bank consortium led by state-run SBI had initiated the process of taking over physical possession of the prized Kingfisher House, worth Rs 100 crore (See: SBI-led lender banks take over Kingfisher House in Mumbai).

Mallya has also been under scanner over issues at his various group companies, including United Spirits Ltd where he has sold the controlling stake to UK-based Diageo Plc.

UK-based Diageo has spent nearly $3 billion for a controlling stake of about 55 per cent in United Spirits Ltd (USL) (Diageo to acquire 53.4 % in United Spirits for Rs11,165 crore).

The company had first acquired 25 per cent in USL from Mallya-led UB Group in late 2012, while it bought further shares from non-promoters last year.

In April this year, Diageo-controlled USL Board said it has ''lost confidence'' in Vijay Mallya after an internal probe and a forensic inquiry by PwC revealed alleged fund diversion to Kingfisher and other UB group entities (Diageo wants Mallya out of USL board over alleged `improprieties').

USL said ''various improprieties and legal violations'' were found in the probe into loans given to UB Group firms and it asked Mallya to quit the board.

However, Mallya rejected the charge against him and said Diageo has contractual obligations to support him.

In July, 2015, USL alleged irregularities and potential violations of law in diversion of funds by UB Group and said it is initiating process to recover dues of Rs 1,337 crore.