India: Vijay Mallya steps down as chairman of United Spirits Ltd

UB Group chairman Vijay Mallya has stepped down as non-executive chairman of United Spirits Ltd, controlled by Diageo Plc., after striking a sweetheart deal with the UK firm which agreed to drop all charges of irregularities under his watch, and pay him $75 million over five years in return for getting him to go, Livemint reported on February 26.

Diageo and Mallya have been sparring for some time over his exit.

One-time billionaire Mallya, known as much for his breadth of ambition as his flamboyance, does not have a group to call his own at this point of time. He controls holding company United Breweries (Holdings) Ltd whose ownership in India’s largest spirits maker United Spirits has fallen to less than 3%; he’s no longer the largest shareholder in United Breweries Ltd; and he has lost management control of Mangalore Chemicals and Fertilizers Ltd.

He has also been declared a “wilful defaulter” by some banks that loaned money to his now-grounded Kingfisher Airlines.

“Having recently turned 60, I have decided to spend more time in England, closer to my children,” Mallya said in a statement.

Diageo said in a statement that the United Spirits board will appoint Mahendra Kumar Sharma, currently independent non-executive director and chairman of the audit committee of United Spirits, as chairman.

“The time has now come for me to move on and end all the publicised allegations and uncertainties about my relationship with Diageo Plc and United Spirits. Accordingly, I am resigning my position with immediate effect,” Mallya said in a surprise statement issued late on February 25.

He said he is pleased to have been able to finalize terms with Diageo and United Spirits.

“The agreement we have reached secures my family legacy,” Mallya said.

Mallya said he had also agreed to a global (excluding United Kingdom) five-year non-compete arrangement with Diageo.

The tussle over Mallya’s chairmanship in United Spirits has been brewing for some time. Diageo completed the purchase of a majority stake (54.7%) in United Spirits in July 2014 and has been pushing for Mallya’s removal from chairmanship since then. Mallya refused to step down.

In April, the board of directors at United Spirits asked Mallya, who holds a 4% stake in United Spirits, to resign from the board after an internal probe allegedly found financial irregularities at India’s largest liquor company.

In its 2015 annual report, United Spirits specified that it has contractual obligations to support Mallya’s interest in the company, as a non-executive director and chairman, subject to certain conditions.

“In the event that Mallya declines to step down, the board resolved to request Diageo to expeditiously review the position in relation to its contractual obligations and authorized sharing with Diageo a copy of the inquiry report and all the materials relating to the company’s inquiry,” United Spirits said in its annual report.

At the annual board meeting of United Breweries in September 2015, Mallya refused to step down as chairman, saying he would continue to preside over the company’s annual general meetings.

“I have agreed a mutual release with both Diageo and United Spirits from claims concerning the alleged irregularities disclosed by USL in April 2015. I am now the Founder Emeritus of United Spirits which recognises my contribution in building United Spirits to what it is today and evokes great emotion and a degree of extreme satisfaction having steered United Spirits from a sales volume of just under 3 million cases to over 120 million cases when control was passed to Diageo,” Mallya said in his statement.

Mallya’s resignation comes at a time when State Bank of India and Punjab National Bank have declared him a wilful defaulter because of his inability to pay dues to as many as 17 banks, amounting to Rs.7,000 crore. The loans were taken by Kingfisher Airlines.

“I fondly remember, as a young boy, launching McDowell’s, which is the largest selling brand in the industry. I also recall the challenges and personal sacrifices in the tumultuous acquisition of Shaw Wallace and the Royal Challenge brand. I feel both happy and satisfied that I helped create United Spirits as a clear market leader in the industry which contributed immensely to the local state economies,” Mallya said

Mallya said “on the sporting front, I will now be the Chief Mentor of the Royal Challengers Bangalore” Indian Premier League (IPL) cricket team.

“I have been passionate about this team since inception and am determined to do whatever I can to win the IPL trophy. I am glad that my son, Sidhartha, will remain as a director (of Royal Challengers Bangalore) as he is equally passionate about RCB,” Mallya said.

Diageo said this week’s agreement ends its prior agreement with Mallya regarding his position at United Spirits; brings to an end the uncertainty relating to the governance of United Spirits; and puts in place a five-year global non-compete, non-interference and standstill arrangement with Mallya.

“The financial terms of today’s agreement with Mallya provide for a payment of $75 million (approximately £53 million) to Mallya over a five year period. This payment will be charged to exceptional items in the year ending 30 June 2016,” Diageo said.

Abanti Sankaranarayanan, business head for luxury and corporate relations at United Spirits, said in a conference call with journalists that Diageo will pay Mallya $40 million in the first year.

The negotiated settlement was the best-case scenario for all— Mallya, Diageo, United Spirits and minority shareholders, said Shriram Subramanian, founder of InGovern Research Services, a proxy advisory firm.

As part of the agreement, Diageo has also extended Smirnoff’s sponsorship of the Force India Formula One team of which Mallya is principal and part-owner for the next five seasons.

The cost of this sponsorship is $15 million (approximately £11 million) per season.

“India is an exciting growth opportunity, and USL has the management team, strategy and capability to deliver on that opportunity. The agreement announced today is in the best interests of both Diageo and USL and allows USL to build on its strong platform in one of the biggest spirits markets in the world,” said Ivan Menezes, chief executive officer of Diageo.

Anand Kripalu, managing director and chief executive officer of United Spirits, said the agreement reached was important to the company and all its shareholders.

“It will allow the Company to prosper and build on the great platform that we have already created in this exciting market,” he added.

26 February, 2016