Bengaluru: The Union ministry of corporate affairs (MCA) and the income tax (I-T) department have begun separate probes into the books of United Spirits Ltd (USL), following an admission by the company that huge sums of money were diverted from the company to other United Breweries (UB) group entities under the previous management led by Chairman Vijay Mallya.

In its notes to the accounts for the financial year 2015, the company said it had received a notice from the ministry for inspection of its books and other papers. The company added it had received a notice under Section 131 of Income Tax Act from the I-T department and was cooperating with the authorities on this matter.

The two probes are in addition to an investigation by the market regulator, Securities and Exchange Board of India (Sebi). An enquiry conducted by PricewaterhouseCooper (PwC)’s UK office into USL’s books, ordered by the company’s board of directors in November last year for financial years 2010 to 2014, found widespread irregularities, with funds being diverted to Mallya-owned UB group companies and to the now defunct Kingfisher Airlines. Many of the loan agreements were not cleared by the shareholders of the company, according to the related party norms, the company said, adding it had sought Sebi’s advice on how to deal with these related-party transactions. Mallya had sold USL to British spirits giant Diageo in 2012 for $2.1 billion.

USL’s shares fell three per cent to Rs 3,509 apiece on the BSE exchange.

The company said it had also received letters from erstwhile auditors Price Waterhouse (PW) and Walker Chandiok & Co, which served as statutory auditors during the period covered by the PwC enquiry. The auditors were seeking to understand the impact of the findings of the enquiry on their reports. “Any remedial measures proposed by the erstwhile auditors will be considered by the company according to the application legal provisions,” USL said.

USL’s annual report for 2010-11 was signed by PW’s Usha Narayanan. PW did not seek a reappointment in 2011-12 and the company appointed Walker Chandiok & Co as the auditor. The roles of both auditors are under the scrutiny of Institute of Chartered Accountants of India. But PW’s role as an auditor as well as an “independent” enquirer has been questioned by Mallya.

USL’s board met on Tuesday to take on record the yearly performance of the company for 2014-15. Mallya, asked by the board to resign as chairman on April 25, attended the board meeting. Mallya had earlier declined to resign, saying he had an agreement with Diageo to continue as chairman for the next five years.

“Under my watch USL accounts were cleanly audited and approved by the Board and shareholders and accepted by all regulatory authorities. I do not see any cause for worry,” Mallya said on Thursday about the board proceedings.

On Tuesday, the board made a provision of Rs 1,700 crore for doubtful loans and reported a loss of Rs 1,956 crore for 2014-15 on revenues of Rs 8,049 crore.

The investigations by the corporate affairs ministry, I-T department and Sebi into USL’s books could increase the problem for Mallya, facing the heat from banks for defaulting on Rs 7,000 crore worth of loans taken by Kingfisher Airlines. The ministry had taken stringent action against Satyam and its auditors when it was found out promoters of the information technology company, the Rajus, had cooked the books with help from auditors. Both the Rajus and Satyam’s auditors have been convicted of fraud by a Hyderabad court.

USL said it had also received a notice from the National Stock Exchange (NSE) following a Sebi circular of August 2012 in relation to its financial report for 2013-14. Sebi has directed NSE to advice the company to suitably rectify the qualifications raised by the auditors, which, USL said, it had already done.

The fund diversion from USL came to light after the PwC UK inquiry revealed that between 2010 and July 2013, a few transactions between USL and UB entities appeared to have been undertaken to show reduced exposure for USL. It was on the basis of this report the USL board had asked Mallya to resign as company chairman. After a defiant Mallya refused, the company decided to call a shareholders’ meeting to oust him. Mallya had told this paper the PwC report was based on half-truths and was “parroting” the script written by Managing Director and Chief Executive Anand Kripalu.

After its takeover, USL had asked PwC to conduct an audit after the new auditor, BSR & Co, noted lack of clarity on liabilities worth Rs 2,100 crore in its report for 2013-14. The due diligence conducted by Deloitte for Diageo during the takeover was silent on these related-party transactions.  Company insiders say it will be difficult for USL to get back these funds from UB group entities and eventually, the company would have to write these off.

United Spirits posts net loss of Rs 1,800 cr in Q4

United Spirits Ltd, India’s largest alcoholic beverages maker, has managed to reduce its standalone net loss at Rs 1,799 crore for the fourth quarter ended March 2015, compared to a loss of Rs 5,380 crore a year ago. During the third quarter ended December, the company had reported a profit of Rs 74.7 crore.

Total income for the quarter went up to Rs 2,051.2 crore as against Rs 1,943.3 crore, showing a growth of 5.5 per cent year-on-year (YoY). Gross margins improved by 480 basis points YoY. Staff costs increased 45.3 per cent YoY to Rs 212.3 crore, including Rs 34 crore towards provisions for an employee incentive scheme.  

The company witnessed lower level of spends in advertising and promotion activities at Rs 196 crore, a decline of 0.7 per cent YoY. The company has also managed to reduce its operating loss during the fourth quarter to Rs 11.9 crore from Rs 927 crore in the corresponding quarter last year.

However, the company took a hit on its profits for the quarter due to provision for loans and advances and investments in the subsidiaries aggregating to Rs 716 crore: Provision for loans and investments in relation to Whyte and Mackay Group aggregating to Rs 184.85 crore, loss on sale of shares of a subsidiary aggregating Rs 10.85 crore. Provision for a loan to a related party aggregating to Rs 995.46 crore and profit on sale of manufacturing unit aggregating Rs 35.65 crore.

During the fourth quarter ended March 2015, the company made a foreign exchange gain of Rs 8.7 crore as against forex loss of Rs 7.8 crore in the year-ago quarter.

Further to Diageo Plc’s undertakings, offered to the UK’s Office of Fair Trade (OFT), which is now called Competition and Markets Authority, the UK, in January 2014, the company’s board of directors decided to initiate a process based on the outlined timetable provided in connection with the decision of the OFT to explore a potential sale of all or part of Whyte and Mackay.

As a culmination of this process, on May 9, 2014, the company’s then wholly owned subsidiary, United Spirits (Great Britain) Limited, entered into a share sale and purchase agreement with Emperador UK Limited and Emperador Inc., in relation to the sale of the entire issued share capital of Whyte and Mackay Group Limited for an enterprise value of 430 million pounds (calculated with a normalised level of working capital), from which deduction has been made for the payment of a warranty and indemnity insurance premium of 0.85 million pounds agreed between the seller and the purchaser. An opinion from a leading merchant banker, addressed to the Board, confirms that the enterprise value is fair from a financial point of view of the company.

On October 31, 2014, the sale of the entire issued share capital of WMG by USGBL to Emperador UK Limited was completed. With the above sale, WMG and its 45 subsidiaries have ceased to be subsidiaries of the company. Part of the proceeds from the sale was used to repay Whyte and Mackay acquisition debt amounting to 370 million pounds.

The USL board, which met in Mumbai on Tuesday, has not declared any dividend for the year in view of the losses incurred during 2014-15.