Lack of spirit

The lack of fireworks at the United Spirits AGM, where Vijay Mallya has continued as chairman despite being requested to step down by the company’s board and being declared a wilful defaulter by SBI just a week ago, shows just how ineffectual the country’s elaborate corporate governance framework is, in deterring even flagrant violators. Two years have passed since Diageo Plc acquired a controlling stake in the Mallya-promoted United Spirits.

An investigation into the company’s financial affairs post-takeover has revealed a slew of “prima facie improprieties and irregularities” ranging from diversion of loans taken from banks, to the lending of funds to group firms to Company Law infractions. The company has written off nearly ₹700 crore in losses on these items, but hardly any action has been initiated either against Mallya or against the managers at the helm of affairs during this period. Instead, the various entities tasked with enforcing governance within the company have been busy lobbing the ball to each other. The company’s board of directors, after taking stock of the inquiry report, has sought “additional investigations”. And after declaring way back in April that it had lost confidence in Mallya continuing in his role as chairman of the company, it has asked the majority shareholder — Diageo Plc (which holds a 54.7 per cent stake in the company) — to “expeditiously review” the issue. Diageo Plc has not acted either, stating that it is constrained by a contract it inked at the time of the takeover to allow Mallya to continue on the board. Here the question is if a private contract between two parties can really supersede the laws of the land and protect top managers from investigations on alleged fraud. Mallya himself easily fobbed off queries raised by shareholders at the company’s recent AGM with the response that he would “think of retiring” at 60.

Even if the board is powerless to do more, it is difficult to understand why the company’s institutional investors can’t take a more activist role. While the retail shareholding in USL is at just 6 per cent, foreign institutional investors (including entities such as the governments of Abu Dhabi and Singapore) own 24 per cent, and domestic mutual funds another 4 per cent. This shows that neither foreign nor domestic institutions, despite their clout with listed companies, can be counted upon to stand up for minority shareholder rights in crunch situations. So, it is imperative for SEBI and the ministry of corporate affairs to intervene at an early stage in such cases. As for USL, the issue is not just about Mallya stepping down; it is also about questioning Diageo Plc on its inaction when faced with governance issues. Merely drawing up newer and more elaborate rules under the Companies Act and the Listing Agreement isn’t going to improve the governance standards of listed firms in a material way.

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