4/29/2015
The Economic Times Title : VIJAY MALLYADIAGEO ROW The Strangest of Brews Author : Hetal Dalal Location : Article Date : 04/29/2015
The tale of two promoters, Diageo and Vijay Mallya, seems to be getting murkier. While the two battle it out in the media (and soon in the courts), it is the concerted failure of governance that is responsible for this tangle.
United Spirits' (USL) board failed in its fiduciary responsibility by allowing USL's cash flows to be leveraged to support the United Breweries (UB) Group, whose ambition was to operate an airline. The transactions with the UB Group were undertaken at a time when regulations did not require shareholder approval. So, there was greater onus on the board to act responsibly. If the board were indeed independent, it may have been more considered in its actions. But USL's board, before Diageo stepped in, comprised largely those loyal to Mallya.
The regulatory changes brought in by Section 188 of the Companies Act, 2013, and the subsequent changes in Clause 49 of Sebi's Listing Agreement provide much needed respite. Shareholders now have a say in such transactions. And in 2014, shareholders voiced their opinion and voted out all the related party transactions proposed by USL at its extraordinary general meeting (EGM). While shareholders voted the way they voted, what is of greater concern is that Diageo allowed these transactions to be presented to shareholders in the first instance.
Diageo's actions in India suggest a greater focus on closing the USL acquisition, in blatant disregard for corporate governance norms. It supported Mallya's reappointment to USL's board in 2014, at a time when Mallya was named a wilful defaulter by banks in relation to Kingfisher Airlines' loans. Would Diageo have reappointed any member with such risks on its global board? Perhaps Diageo decided that being named a wilful defaulter was not a serious enough charge for it to renege on its shareholder agreement.
The larger question is: what prompt ed Diageo to sign a shareholder agree ment that allows Mallya, a lessthan 5% shareholder, to remain chairper son of USL? Sure, shareholder agree ments allow board representation of previous owners to maintain continue ity and gain from previous experien ce. But to allow Mallya to continue which enabled him to control board proceedings was ceding far too much ground.
Even more surprising is Diageo's no mination of P A Murali on the board.e Murali has been a UB Group loyalist for over 20 years and was USL CFO. In stead of holding him responsible for postponing finalising accounts three times and the 201314 writeoffs on ac count of the intragroup exposure (in cluding passthroughs via third parti es), Diageo gave him a pay rise and a handsome bonus. Diageo's claim that it was not in the know rings hollow.
The failure of auditors to highlight the financial irregularities earlier is possibly the most egregious in this entire saga. Auditors are supposed to provide an independent oversight to financial statements. In this case, the issues were not raised until the financial statements for the year ended March 31, 2014, were published. The auditors qualified their audit report, but all this after much had been done.
Auditor rotation typically brings fresh oversight, enhancing the quality and objectivity of the audit process.But in USL's case, this yielded no results. Moreover, the audit firm that conducted the forensic audit was the same as for the period during which the alleged irregularities occurred. Do shareholders rely on PricewaterhouseCoopers' statutory audit or PricewaterhouseCoopers' forensic audit? http://epaperbeta.timesofindia.com/Article.aspx?eid=31818&articlexml=VIJAYMALLYADIAGEOROWTheStrangestofBrews29042015016024 1/2 4/29/2015 The auditor community needs a greater fear of repercussions for conducting poor quality audits. Auditors today are answerable to no one other than their own standards and an ineffective review board of the Institute of Chartered Accountants of India. The quality of the audit usually gets established in hindsight only if skeletons emerge from the cupboard. The Companies Act, 2013, allows a classaction suit against auditors. But the sections relating to the classaction suit are yet to be notified. At best, Sebi can push the company to restate its financials based on the audit qualification.
To expect Mallya to resign without a fight is idealistic, given that he may have a legally tenable position. But that is not what corporate governance is about. Good governance is about doing what's right for all, and not sacrificing the gain of many at the altar of one. So, when the board asks Mallya to resign, he must because it is good for the company and its stakeholders.
Now it seems that the battle is between two sets of `promoter' shareholders. But as events unfold, this will impact minority shareholders, sooner and harder than they expect.
The writer is COO, Institutional Investor Advisory Services India
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