Diageo asks Indian subsidiary founder to resign after 'improprieties'

An investigation at Diageo's 54.78%-owned Indian arm United Spirits (USL) has led it to demand the resignation of the business's chairman Vijay Mallya, though the 'liquor King of India' has refused.

An internal inquiry, led by Pricewaterhousecoopers, conducted into loans given by USL to numerous Mallya's group companies found “various improprieties and legal violations”, leading to the board of USL stating on Saturday that it had lost confidence in Mallya continuing in his role as a director.

On Monday the company reported the matter to the Securities and Exchange Board of India (Sebi).

Vallya said the inferences and allegations were unjustified and false, and according to the Times of India, has lined up a battery of top lawyers to help him deal with the "holy mess".

The USL board said that, if Mallya declined to step down, it would recommend his removal as a director and chairman of the board.

But Diageo pointed out that it had "certain contractual obligations to support Dr Mallya continuing as non-executive director and chairman of USL subject to certain conditions and in the absence of certain defaults".

The FTSE 100 company said it will now consider its position under its agreements with Mallya and his United Breweries company.

Mallya told the Hindu that he has a “valid contractual agreement” with Diageo on his position as diirector and chairman of USL and he would discuss the matter “bilaterally” with the UK-based company.

Broker Shore Capital said while the wrangling "will be an unwelcome distraction to Diageo’s management", in its analyst's view, "it does not have a material impact on the group’s investment case".

Saturday's statement from USL, which has already seen a number of exits from its board and top management since Diageo launched the probe, said: "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.”

It added: “The inquiry prima facie revealed that between 2010 and July 2013, certain transactions entered into on behalf of the company appear to have been undertaken to show a lower exposure of the Company (and its subsidiaries) to United Breweries Holdings (UBHL) than that which actually existed at the relevant time, that is prior to July 2013.”

“All of the dues owing to the company and its subsidiaries from UBHL aggregating Rs 1,337 crores [£138.54m] on July 3, 2013, were consolidated into a single loan agreement dated 3 July 2013 entered into between the Company and UBHL."