Sebi may order fresh open offer by United Spirits for small investors

Concerned over the 'loss' caused to United Spirits' minority shareholders due to $75-million sweetheart deal between its erstwhile promoter Vijay Mallya and new owner Diageo, the Securities and Exchange Board of India may soon order additional payout for small investors by way of a fresh open offer.

Sebi, which on Wednesday night barred Mallya and six others from the securities markets on fund diversion charges and also restrained him and Ashok Capoor (ex-MD of United Spirits) from holding a directorship at any listed firm, is also probing "change in control of USL" due to a settlement pact under which the beleaguered businessman agreed to exit from boards of USL group companies on payout of $75 million.

Sources said that the investigation conducted by the markets watchdog shows change in effective control of the company after this settlement agreement, resulting significant ownership gains to the new promoters in addition to the monetary benefits to the old owners, thus causing a "loss" to the minority shareholders of the company, reports PTI.

"Sebi's investigation has reached an advanced stage and the regulator may have to order an additional payout to the minority shareholders, possibly by way of a fresh open offer," a senior official said.

This is separate from an 'additional payout' that Sebi had ordered Diageo in June last year to pay to the minority shareholders, who had tendered their shares in an open offer in 2012, on account of $140.97 million payment to Stanchart Bank with respect to liability of Watson Ltd, another Mallya- affiliated company, pursuant to default on a bank guarantee. UK-based Diageo has filed an appeal before the Securities Appellate Tribunal against the aforesaid SEBI direction.

Besides, Sebi is also separately looking into the role of certain auditors for their alleged failure to detect "diversion of funds from USL" to certain companies of Mallya-led UB Group, including the erstwhile Kingfisher Airlines whose collapse led to the entire business group running into financial troubles. Sebi had on Wednesday night barred Mallya and six former officials of USL from securities markets in a case related to illegal fund diversions.

Further, Sebi has asked USL, from where Mallya resigned as director and chairman in March 2016, to provide details about steps being taken to recover the diverted funds.

Sebi has restrained Mallya, Capoor and five others from the securities market and also from "buying, selling or otherwise dealing in securities in any manner whatsoever, either directly or indirectly" till further directions.

The five others are: P A Murali, Sowmiyanarayanan, S N Prasad, Paramjit Singh Gill and Ainapur S R. Mallya and Capoor have been barred from "holding position as directors or key managerial persons of any listed company".

Reacting to Sebi's order, Mallya said he was "surprised".

"Neither have I had any communication with Sebi nor have I ever been afforded a hearing before this purported action has been taken. I have always strongly denied all allegations made by USL," he said in a statement.

He also took to Twitter to say that "allegations of fund diversion out of USL are baseless" and said "USL accounts were approved by top auditors, an eminent Board of Directors and shareholders".

As fresh troubles emerged after Mallya agreed to sell to Diageo a controlling stake in his erstwhile flagship firm USL, the two got into a bitter boardroom battle, which they later sought to end with $75 million pact in February 2016.

Sebi's latest order came close on the heels of the Central Bureau of Investigation naming Mallya, Kingfisher Airlines and nine others in the charge sheet related to the 2015 loan default case.

Sebi said it is also examining the settlement agreement between Mallya and Diageo as well as the role of auditors in the non-detection of diversion of funds from USL.

In furtherance of this pact, Mallya resigned as chairman and non-executive director of USL. On the same date, USL and Mallya entered into an agreement wherein they agreed to a mutual release in relation to matters arising out of the Initial Inquiry by USL.

"The matter of Diageo entering into a Settlement Agreement with Mallya vis-a-vis USL's agreement with Mallya is being examined separately by Sebi," the regulator said. Under the settlement pact, Diageo agreed to pay $75 million to Mallya who in turn agreed to resign from his position as Chairman and Director of USL and also Director in other USL Group companies.

"Diageo and USL agreed with UBHL and Kingfisher Finvest India Limited to terminate the Shareholder's Agreement entered into between the parties on November 9, 2013. The aspect of change in control of USL is also being examined separately by Sebi," the regulator added.

It has been alleged that funds were diverted from USL to other Mallya companies between 2010 and 2013.

As per a PwC-UK report, the diverted amount is Rs655.55 crore while E&Y report estimated the money at Rs1,225.24 crore, according to details cited in the Sebi order.

In a 32-page order, Sebi whole time member S Raman said the alleged prima facie violations observed in the case are serious and have larger implications on the safety and integrity of the securities market.

"Investors might have based their investment decisions on the manipulated books of accounts prepared and presented by these persons.

"It would therefore not be in the interest of the securities market and the interest of investors to allow persons of such doubtful demeanour to continue to act as KMPs in the company or in other listed companies or allow them to deal in the securities market," he said.

In its order, Sebi also asked USL to provide details within three weeks about the action taken against Mallya and the six individuals.

Besides, the company has to submit information about the steps taken to recover from Mallya and the companies to which the amount was wrongly diverted.

Meanwhile, another UB group company United Breweries Ltd yesterday said it is not privy to any of the loans taken by Kingfisher Airlines or investigations related to it.

"UBL is an independent listed entity engaged in beer business and is not concerned with KFA (Kingfisher Airlines) in any manner whatsoever," United Breweries Limited (UBL) said in a reply to the BSE, which had sought clarification on CBI charging Vijay Mallya with fraud and criminal conspiracy.

CBI in its charge sheet said that Mallya-led Kingfisher Airlines diverted Rs. 263 crore from Rs. 900 crore IDBI loan for "personal use".

The chargesheet names Mallya, Kingfisher and nine others, including the then IDBI Chairman Yogesh Aggarwal who was arrested on Monday, in the 2015 loan default case.

Meanwhile, Diageo in a regulatory filing with the US Securities Exchange Commission (SEC) said that the company and USL are "cooperating fully with the authorities in relation to these matters, and ... USL itself reported the matters covered by the Initial Inquiry and the Additional Inquiry to the relevant authorities."

Referring to Sebi's June 2016 direction for additional payment to minority shareholders of USL, Diageo said it believes "decision in the Sebi notice to be misconceived and wrong in law and has appealed against it before SAT on 29 July 2016.

"The matter was last listed before SAT on December 6, 2016, on which date no substantive hearing took place and is next posted for 15 February 2017.

"Diageo is unable to assess if the notices or enquiries referred to above will result in enforcement action or, if this were to transpire, to quantify meaningfully the possible loss or range of loss, if any, to which any such action might give rise if determined against Diageo or USL," it added.

Listing out various regulatory notices in relation to USL, Diageo said the two entities have received various notices from Indian regulatory authorities, including the Ministry of Corporate Affairs, Serious Fraud Investigation Office, National Stock Exchange, Income Tax Department, Enforcement Directorate, Sebi, Bangalore police, Central Excise Intelligence and the Institute of Chartered Accountants of India.

On notices from Sebi on the settlement pact with Mallya and the Watson backstop guarantee arrangements, the UK-based liquor giant said, "Diageo and USL have complied with such information requests and Diageo has confirmed that, consistent with prior disclosures, the Watson backstop guarantee arrangements and the matters described in the February 25, 2016 announcement were not the subject of any earlier agreement with Mallya.

Sebi had asked Diageo that if there is any net liability incurred by Diageo on account of the Watson backstop guarantee, such liability, if any, would be considered to be part of the price paid for the acquisition of USL shares under the SPA which formed part of the Original USL Transaction and that, in that case, additional equivalent payments would be required to be made to those shareholders (representing 0.04 per cent of the shares in USL) who tendered in the open offer made as part of the Original USL Transaction.

"Diageo is clear that the Watson backstop guarantee arrangements were not part of the price paid or agreed to be paid for any USL shares under the Original USL Transaction and therefore believes the decision in the Sebi notice to be misconceived and wrong in law," the company said.