The beginning of the endgame for Vijay Mallya?


May 11, 2015

Bengaluru/Mumbai: For someone who used to revel in publicity, Vijay Mallya is keeping an uncharacteristically low profile these days.

The board's order to Mallya to vacate the chairman's office at the firm he built into India's biggest liquor maker was the biggest blow to Mallya in three torrid years. Photo: AFP

May 11, 2015

Bengaluru/Mumbai: For someone who used to revel in publicity, Vijay Mallya is keeping an uncharacteristically low profile these days.

The board's order to Mallya to vacate the chairman's office at the firm he built into India's biggest liquor maker was the biggest blow to Mallya in three torrid years. Photo: AFP

The man once known for the lavish parties he hosted on his luxury yacht, his love of race horses and motor racing, posing with glamorous models at shoots for the Kingfisher calendar, splurging money at auctions in the UK to buy and restore to India the legendary sword of Tipu Sultan and Mahatma Gandhi memorabilia, doesn’t put on display the flashy, flamboyant side to his personality.

“Mallya came to Parliament one day during last week’s session. He was in a sombre mood,” says a person who met Mallya recently. “He looks lonely, dejected and lost. He was never like that (earlier),” the person said, requesting anonymity.

Mallya is an independent member of Rajya Sabha, the upper House of the Parliament of India.

If the 60-year-old UB Group chairman is feeling out of sorts, he has good reason to be. Mallya is now engaged in possibly the highest-stakes battle of his career.

Last month, the board of United Spirits Ltd (USL), now controlled by Diageo Plc., asked Mallya to resign as chairman and director after an internal investigation suggested that he may have been involved in financial irregularities at the liquor firm.

The probe was led by chief executive officer (CEO) Anand Kripalu, who was appointed last year by Diageo.

Mallya hit back saying the probe was “severely flawed” and declined to resign.

“All I wish to say is that I intend to continue as chairman of USL in the normal manner. This includes chairing monthly operating review meetings and board meetings.”

“I have a valid contractual agreement with Diageo Plc, which directly addresses my position as director and chairman of USL. I will discuss this bilaterally with Diageo Plc and not in the public domain,” he added.

The outcome of this battle is anyone’s guess.

The board’s order to Mallya to vacate the chairman’s office at the firm he built into India’s biggest liquor maker was the biggest blow to Mallya in three torrid years, during which he was forced to ground his Kingfisher Airlines and give up the reins of USL to Diageo, which bought a controlling stake in the liquor maker in July 2013 and increased its holding to around 55% last year.

Soon after USL finally reported its thrice-delayed fourth-quarter (January-March 2014) earnings in September, the firm initiated an inquiry into its accounting practices as several cases of suspected financial impropriety surfaced.

Among other issues, the internal inquiry looked at loans by United Spirits to UB Group entities that were used to prop up Kingfisher Airlines Ltd from 2010 to 2013. United Spirits said the inquiry revealed the company may have understated the amount it was owed by United Breweries (Holdings) Ltd (UBHL), the parent company of Mallya’s UB Group.

United Spirits and UBHL entered into an agreement in July 2013 when the firms agreed to convert all loans by United Spirits into a single loan deal of `1,337 crore. United Spirits is now suggesting that the amount may be higher.

United Spirits also said it would report the transactions covered under the probe to the authorities, as required under applicable law, without specifying the particular regulators.

Mallya has appointed top lawyers, including Harish Salve, a former solicitor general of India, to represent him, according to two people familiar with the matter. (The Times of India reported this earlier).

Analysts said Mallya should step down, at least until his name is cleared.

“Mallya has been defiant, saying that he has a contractual agreement with Diageo to hold his position on the board,” said Institutional Investors Advisory Services, a proxy advisory firm. “But Mallya forgets that directors have a fiduciary responsibility towards shareholders and the company itself. A board position cannot be a goal in itself—it must serve the interest of the company and its stakeholders. Therefore, Mallya must ask himself—does fighting to stay on the board serve the company or its stakeholders at this stage?”

Corporate warrior

Mallya, who inherited UB Group at the age of 28 after his father Vittal’s death in 1983 from a heart attack, is no stranger to corporate battles.

Even though his conglomerate is in dire straits, the tycoon won his most recent battle, or sort of.

Mallya was forced to resign as chairman of Mangalore Chemicals and Fertilizers Ltd (MCFL), another UB Group company, but he was still able to engineer a sale to his preferred partner.

Mallya teamed up with his friend, industrialist Saroj Kumar Poddar, to ward off a hostile takeover bid for Mangalore Chemicals from Pune-based Deepak Fertilisers and Petrochemicals Corp. Ltd.

Poddar persuaded Mallya to back him and, along with the strength of his own 16.4% stake, made sure Deepak Fertilisers didn’t get close to acquiring a majority stake in Mangalore Chemicals. Last month, Deepak Fertilisers sold a substantial part of the 24.46% stake it had built in Mangalore Chemicals over almost two years.

The trouble for UB Group began much earlier; it has been falling apart ever since Kingfisher Airlines, Mallya’s ill-fated venture into the loss-making airline business, was grounded in October 2012 under the weight of debt and accumulated losses to the tune of `16,000 crore​ and facing staff unrest over unpaid salaries.

Kingfisher’s slide is well documented. In short, the company spent too much money, most of which was borrowed from banks, without ever building a sustainable business model. When banks refused to fund its extravagance and Mallya couldn’t find a foreign airline willing to put money into the business, it was forced to slash its fleet, workforce and other parts of operations. Finally, the government suspended Kingfisher’s licence. Kingfisher dragged down the entire UB Group along with it. Mallya was forced to sell control of United Spirits, his cash machine, to Diageo. Subsequently, UB Group and Mallya, in his personal capacity, lost much of their holdings in group companies as Kingfisher’s creditors sold pledged shares to recover their dues.

Since Kingfisher’s grounding, Mallya has been declared a wilful defaulter by banks and the UB Group’s ownership in all listed portfolio companies has declined. Now, he’s facing the prospect of being ousted from United Spirits while the possibility of regulatory action looms, depending on whether the regulators decide to investigate the alleged financial improprieties and how they view the matter.

The entities controlled by Mallya own about 33% of United Breweries, 4.90% of United Spirits and 22% of Mangalore Chemicals. These stakes are worth roughly `11,400 crore (as per current market prices), but more than half the shares in United Breweries and United Spirits are pledged with UB Group. Mallya’s other company is worth little. What’s more, the UB Group’s primary investment vehicle, United Breweries Holdings, is in deep trouble. United Breweries, which is listed in Mumbai, has given corporate guarantees worth `8,159 crore to cover Kingfisher’s debt.

Groups of Kingfisher lenders, which include State Bank of India and United Bank of India, have filed as many as eight winding up petitions against United Breweries Holdings in the Karnataka high court. The company also has other exposure worth `300 crore to Kingfisher.

United Breweries Holdings’ auditor, Vishnu Ram and Co, issued a qualified report on its accounts for the year ended March 2014, saying that the company had not provided for its exposure to Kingfisher.

United Breweries Holdings has been written off by investors and analysts so much so that there aren’t any equity research analysts tracking the firm, which was once considered essential for understanding UB Group companies.

Building UB

Mallya became chairman of the sprawling conglomerate, succeeding his late father, at a time when UB sold about 2.85 million cases of liquor per year, and its beer sales were lower than the likes of Golden Eagle and Mohan Meakins. The conglomerate’s other businesses included pharmaceuticals, agrochemicals, paints, petrochemicals and plastics, batteries, food and carbonated beverages. Over time, Mallya either shut or sold the pharmaceuticals, batteries and the food and beverages businesses.

He spent money diversifying. Apart from Berger Paints, he bought a large engineering firm (Best and Crompton) in 1988; a dying firm called Malabar Chemicals and Fertilizers in a cut-price deal in 1990; and stakes in media businesses such as The Asian Age and the publisher of Cine Blitz—a Bollywood magazine.

Much of his efforts and money, though, went into the liquor and beer business.

Now he’s fighting for his place on the board.

“It is a serious question before the corporate world whether any promoter like Mallya should stay on or insist to continue as the chairman, when, on one hand, he has been declared a wilful defaulter by bank(s), while, on the other hand, the board of an established company like United Spirits does not wish Mallya to continue as the chairman,” said Rajesh Narain Gupta, managing partner at SNG and Partners, a legal consulting firm.

United Spirits’ move against Mallya in late April surprised UB Group executives.

Earlier in that week, United Spirits said chief financial officer (CFO) P.A. Murali, a company veteran known to be close to Mallya, resigned, without elaborating.

In 2013, Diageo had named Murali as one of its nominees on the board of United Spirits and paid him nearly `20 crore in compensation since. According to two UB Group executives, Murali was forced to resign by CEO Kripalu after the findings of the probe revealed potential financial and legal violations.

“There were several discussions between Diageo and United Spirits and there was disagreement on multiple issues. But this turn of events is truly perplexing. There is no explanation to this move (to force Mallya and Murali out),” one of the two people cited above said. Both spoke on condition of anonymity.

Whatever may be the reason for Diageo to start the battle, it’s clear that there can be only winner at the end of it.

In the past, whenever people wrote off Mallya, he found a way of bouncing back. Can he do it again?

Courtesy: LiveMint