London-based spirits company Diageo Plc placed itself on a firm ground after it revealed on Monday that it will continue to back Vijay Mallya as Chairman of its subsidiary United Spirits Ltd (USL) only if there are no defaults by Mallya.

Diageo is obliged, under the shareholders agreement and a separate pact with Mallya, to support his continuation as a non-executive director and chairman of USL.

But these obligations are subject to the conditions and if there is no default by UB Holdings and Mallya, Diageo said.

According to analysts, this could save Diageo a lot of trouble as once it approves USL’s probe report, it can swiftly withdraw support to Mallya, thereby removing him as the chairman and non-executive board member.

The probe report, submitted to SEBI as well as BSE, claimed that when under Mallya’s control, USL had diverted funds worth about ₹2,000 crore to UB group companies like Kingfisher Airlines.

Lalit Kumar, a partner with law firm J Sagar Associates, told BusinessLine that Mallya can be removed from his post through a simple majority at an extraordinary general meeting (EGM), though he will be given a chance to prove his innocence before the shareholders. The move to oust Mallya can be carried out through a poll. “If the shareholders vote against him, then law will prevail over the contract entered into between Mallya and Diageo,” Kumar said.

However, Mallya will have the option to move court seeking to bar the shareholders holding an EGM to consider the issue of dismissing him from the board.

Meanwhile, the stocks of USL, United Breweries and UB Holdings took a beating on the bourses earlier in the day, before closing flat. With USL providing a report of the probe panel to Diageo, it will “now consider its position under its agreements with Mallya and United Breweries (Holdings) Ltd (UBHL) in light of the inquiry report and materials provided to it,” said the British firm.

Diageo pointed out that under the shareholders agreement, both Diageo and UBHL agreed to use their respective rights as shareholders such that, among other things, the latter would be able to nominate one director (who would be Mallya) to the USL board.

This right of UBHL is subject to it continuing to hold at least 1,307,950 shares in USL and Mallya continuing to control UBHL. In certain circumstances where Mallya ceases to control the holding company, he may be able to nominate himself as a director of USL, subject to his holding of at least 1,307,950 USL shares.

Previously, UBHL also had the right to recommend a second, independent, non-executive director as long as it continued to hold at least 6,539,750 shares in USL. Following an earlier reduction in the UB group’s shareholding in USL, this recommendation right has now fallen away.

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