In the wrong spirit

In the past year, the corporate affairs ministry and SEBI have been on a regulatory overdrive to tighten material disclosure and governance norms for listed companies. But ushering in changes to corporate governance regulations seems to be the easy part. The real challenge, if the United Spirits case is anything to go by, lies in getting recalcitrant firms to actually comply with them. Public shareholder interests certainly seem to be coming last in the ongoing boardroom battle at United Spirits, now majority-owned by Diageo Plc.

In September 2014, soon after acquiring majority stake in United Spirits, Diageo Plc initiated a forensic investigation into its financial transactions. With the inquiry report submitted on April 25, the company’s Board has alleged that the company undertook “certain transactions”, which were “prima facie” improper and illegal between 2010 and 2013 to divert shareholder funds, to Kingfisher Airlines. A sketchy disclosure to the stock exchanges states that the company’s financials “understate” the loans due from group companies, thus requiring a complete restatement of its accounts. Armed with this report, the Board has then called for the stepping down of Chairman Vijay Mallya. He has refused, citing a contractual agreement with Diageo Plc, which appointed him in this role. Now, few can dispute that financial irregularities by a company’s top management or diversion of capital to group firms fall well within the ambit of the ‘material events’ that require to be disclosed to public shareholders within a day. Yet, after making these disclosures, the company has been stone-walling demands by the two stock exchanges to make public the actual contents of the report. It has taken shelter behind the claim that it contains “sensitive commercial and operational information” and that shareholders must wait for the restated accounts. The stock exchanges, as the first-line regulators who are specifically empowered to enforce the material disclosure rules, have the option of either arm-twisting the company into complying or taking swift penal action against it. But this is not all. If a forensic audit has indeed found evidence of accounting fraud at United Spirits between 2010 and 2013, the auditors of the firm for those years need to be probed for either negligence or complicity.

There have been other governance infractions too in this episode. Diageo Plc — the majority shareholder — has remained a largely silent spectator citing the agreement that contractually binds it to support Mallya’s chairmanship. Given that a private contract between promoters cannot supersede governance laws enshrined in the Companies Act or SEBI’s investor protection regulations, it now seems to be up to the firm’s institutional and public shareholders to take an activist role to effect Board-level changes. Independent directors on the company’s Board, tasked with protecting minority interests, do not seem to have played a very constructive role in the entire episode either, with three of these directors resigning in the last one year without throwing light on these irregularities.

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