Mallya: Diageo had ‘complete knowledge’ of diverted funds

VJ Mallya, the former head of India’s United Spirits (USL), who is fighting extradition proceedings from the UK, has alleged that Diageo had “complete knowledge” of the cash diverted from India’s biggest drinks company to prop up his ailing empire, notably Kingfisher Airlines, which collapsed into bankruptcy in 2012.

The allegation is contained in a detailed report in the Wall Street Journal on Diageo’s 2013 takeover of USL.

The WSJ alleges that Diageo executives, including the now chief executive Ivan Menezes, were shown a handwritten ledger detailing advances from USL to other Mallya companies during the process of due diligence before the takeover was finalised. It also claims that Diageo executives saw details of payments made by USL to politicians in return for licences in key Indian states.

Diageo denies the allegations, saying: “At no time were we made aware of the diversions of funds Dr Mallya now suggests Diageo was ‘happy with’. His claims that we ‘analysed all the underlying documents’ and were therefore ‘happy with the transactions happening at USL’ are false.”

Diageo stresses that “evidence of diversion of funds only became clear after the closing of the transaction”. For its part, the world’s biggest liquour company alleges that Mallya diverted nearly $500m from USL and that it has not been repaid.

“Throughout the process of seeking to acquire USL, Diageo acted appropriately and in accordance with all legal obligations,” Diageo says.

“Evidence of diversions of funds only became clear after the closing of the transaction. Under Diageo’s control USL’s management has been replaced, and USL has strengthened its controls systems, corporate governance, compliance practices and framework.

“We have and will continue to cooperate fully with authorities in the UK and India to provide the necessary facts to allow them to pursue historic wrongdoing at USL.”

Despite Diageo’s unequivocal denial that it was aware of the alleged illegalities at USL before it became the controlling shareholder, the Wall Street Journal‘s report is likely to intensify scrutiny of the deal, not least by India’s Central Bureau of Investigation and the Enforcement Directorate, both of which are investigating Mallya for criminal conspiracy and money laundering.  Britain’s Serious Fraud Office is also said to be working with India on the money laundering allegations.

At minimum, the saga of USL’s takeover is a distraction for Diageo and a drain on its management time. Nor is it likely to be resolved soon.

Several of Mallya’s creditor banks believe that he sold shares to Diageo that had been pledged as collateral for loans and they are seeking court rulings to have them returned. In total the shares concerned represent about 7% of USL’s equity. Diageo rejects the banks’ claims.

In addition, the Wall Street Journal report suggests that the authorities in both India and the UK are widening their investigations to discover whether Diageo assisted Mallya to divert assets overseas through other deals related to the USL takeover.

In January Diageo was ordered by India’s securities regulator to compensate USL shareholders for a $140m payment made last year to pay off one of Mallya’s overseas debts. Diageo is appealing that ruling.

The next stage of India’s request for Britain to extradite Mallya, who has been convicted of contempt of the Supreme Court, will be in mid July. The full hearing has been scheduled for December, but whatever the ruling then, the case looks likely to run the full course of the British legal system of appeals.

Mallya denies all charges against him and claims that he will not receive a fair trial in India because the charges are politically motivated.