USL funds diversion not covered by scope of Diageo’s due diligence

London-based Diageo plc’s due diligence exercise before acquiring United Spirits Ltd (USL) did not throw up underlying transactions carried out during the tenure of Vijay Mallya as Chairman of the Indian liquor major.

It came to light only when the auditors made their observations in the financial statement for the year ending March 2014. The board then sought a probe into the entire matter.

The MD & CEO of USL, who headed the probe, roped in audit firm PwC. The inquiry, which was also assisted by Diageo’s officials, covered various matters, including certain doubtful receivables, advances and deposits.

The inquiry revealed that between 2010 and 2013, funds involved in many of these transactions were diverted from the company and/or its subsidiaries to certain UB Group companies, including, in particular, Kingfisher Airlines Ltd. Sources in Diageo as well as USL told BusinessLine that the due diligence only revealed the extent of the company’s adherence to corporate governance and the need to bring it on par with international norms, certain company loans as well as the huge potential that USL provided for expansion.

All set for AGM The new revelations come a day before USL’s AGM, on Thursday, which for the first time will be presided over by new Chairman MK Sharma.

Several corporate governance entities as well as Mallya have claimed that an extensive due diligence was carried out at the time of the acquisition of USL, and it did not reveal any unusual and improper transactions at that time. Hence, the fresh findings are “unfounded allegations”, Mallya had said in a press statement last week.

The sources also made it clear that due diligence is not forensic accounting, which the latest EY probe was. PwC, which was given the task of conducting the initial probe, had recommended an additional probe into certain irregularities which was then conducted by EY.

Once the initial probe report revealed that there were financial irregularities, USL started acting on it. The first to go was PA Murali, who was the CFO as well as ED of the company.

In April 2015, the board asked Mallya to resign though he refused to do so. In February this year, Diageo struck a deal with Mallya, promising him $75 million if he resigned. It has already paid the first tranche.

The sources said the next tranche is due only in February 2017. Therefore, there is enough time for Diageo to firm up its decision on whether it wants to go ahead with the payment.

The additional probe by EY revealed fund diversions amounting to ₹1,225.3 crore. The sources said forensic audits tend to take longer, and hence it took some time to complete the report.

Sources in USL also pointed to the great deal of work that has been done by the USL board to move the business forward. In addition, the board has directed the management to pursue recovery from the relevant companies and individuals and undertake any required action including legal and regulatory.

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