Diageo-owned United Spirits raises concerns again over its accounting of items related to debtors and a loan given to its promoter UB Group; company has twice delayed reporting its Q4 results because of accounting problems
June 18, 2014
(Mint (New Delhi))
– United Spirits Ltd (USL), which has twice delayed reporting its fourth-quarter results because of accounting problems, again raised concerns on Tuesday over its accounting of items related to debtors and a loan given to its promoter UB Group.The latest development is a blow to Diageo Plc., which now controls India's largest liquor company, and raises doubts about Diageo's ability to quickly turn around USL into a high-margin earning distiller with Western standards of corporate governance and business practices, analysts said.
"It clearly looks like Diageo is cleaning up USL's books. If the open offer wasn't in place, the stock would've gone down sharply by now," said an analyst at an overseas brokerage, who declined to be named. "Delaying results thrice does raise red flags and would scare investors. It also shows that it will take much longer for Diageo to turn around United Spirits than what many investors previously believed."
Since buying a 25.02% stake in USL from the company and Vijay Mallya-owned UB Group in July last year, Diageo has sought to tighten corporate governance practices at the firm.
Last August, Diageo moved 100 UB Group executives off the payrolls of USL. These executives, who held positions at the UB Group, were being paid their salaries by the distiller.
Diageo hired the consulting firm Deloitte to vet USL's contracts with other UB Group companies to ensure these agreements are "arm's length transactions", Mint reported on 6 March. Deloitte, which has been working with USL on various projects, had been asked to ensure that the terms of its contracts with United Breweries Holdings Ltd (UBHL) and other UB Group firms do not give an unfair advantage to these companies.
On Tuesday, USL said it was in talks with UBHL, the holding company of Vijay Mallya's UB Group, about the status of an unsecured loan worth Rs.1,351.26 crore it had given.
"The company is awaiting certain information from UBHL for determining the treatment in the company's accounts of such loan together with the applicable interest accrued until 31 March 2014," USL said in a statement to the BSE.
It also said it was inquiring about the "position of certain balances" worth Rs.590 crore owed to it by debtors including distributors and bottlers.
The company's shares fell 1.41% to Rs.2744.80 on Tuesday on the BSE, while the benchmark Sensex rose 1.31% to 25,521.19 points.
The stock has been propped up by the price of Rs.3,030 per share Diageo offered shareholders for selling their equity to take its stake in the Bangalore-based spirits company to nearly 55%.
Diageo, which negotiated the right to appoint the chief executive officer (CEO) and chief financial officer (CFO) at USL when it struck the deal in November 2012, appointed former Cadbury India head Anand Kripalu as the new chief executive starting in May.
A group of banks including State Bank of India, which are owed over Rs.7,000 crore by the UB Group's defunct airline Kingfisher Airlines Ltd, have filed winding up petitions against UBHL, which had given corporate guarantees for Kingfisher's borrowings. Earlier in June, these banks threatened to stop giving further loans to USL unless Mallya was removed as chairman, according to two people familiar with the matter who spoke on condition of anonymity. Lenders also threatened to declare Mallya a wilful defaulter, but he sought more time to clear the dues, they said.
Once an entity is classified as a wilful defaulter, the company and its promoters cannot raise money from other financial institutions. They are also prohibited from starting new ventures for five years.
As per Reserve Bank of India norms, a bank may declare a firm a wilful defaulter when it does not repay loans despite having the capacity to, when money is diverted or siphoned off, or the firm disposes of the assets against which the loans were taken.
United Spirits did not disclose details of the communication sent by Mallya to the lenders.
"The promoter Vijay Mallya is also trying for some government interventions and likely to seek an appointment with the newly-appointed finance minister," one of the people cited above said.
USL has already taken a hit of Rs.3,690.3 crore to its net worth as the company said on 3 June that the proceeds from the sale of its Whyte and Mackay whisky business would not be enough to repay a loan it had taken to buy it.
USL was expected to report it fourth-quarter and full-year results on 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 it will take more time to report its results, partly because of the accounting related to the sale of its Whyte and Mackay whisky business.
USL on Tuesday did not specify when it would report results, saying it is "aiming to complete the above enquiries as expeditiously as practicable, in order to finalise the accounts of the company".
USL had said on 9 May it will sell its Whyte and Mackay unit to the Philippines-based Emperador 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 United Spirits on whisky prices in the UK.
But not all analysts are worried. Diageo and USL had different accounting practices and differences were bound to emerge during mergers and acquisitions, said Abneesh Roy, associate director, institutional equities research, Edelweiss Securities Ltd. "I don't see a big concern here." Published by HT Syndication with permission from MINT. For any query with respect to this article or any other content requirement, please contact Editor at email@example.com
(c) 2014 HT Media Limited