SEBI Order in the United Spirits Case

Over the last year or so, there has been
considerable discussion in the press about the allegations of diversion of
funds by the erstwhile management of United Spirits Limited (USL) to other
companies within the United Breweries (UB) group, including Kingfisher Airlines
Limited (KFA). This was also a result of investigations conducted by USL
through certain audit firms. Subsequently, this became a subject matter of SEBI
investigation, which yesterday resulted in an ad
interim ex-parte order
passed by a whole-time member of SEBI.
The transactions that led to SEBI’s
investigations and the present order are too detailed to be discussed in this
post, and are available in SEBI’s order. However, SEBI’s key ground is that by these
transactions value was diverted from USL, which is a listed company, to other
companies within the UB group, thereby adversely affecting the minority
shareholders of USL. This was done so not only in contravention of various
regulations prescribed by SEBI, but at the instance or with the knowledge and
involvement of the key managerial personnel (KMP) of USL at the time, including
Mr. Vijay Mallya.
After discussing the various transactions
and the possible justifications provided by USL, SEBI concluded its findings as
follows:
2.2       Considering the aforementioned facts and
circumstances, it appears that Mallya in his capacity as Chairman of USL during
the relevant period was instrumental in the diversion of funds from USL. In his
endeavor to supply funds from USL to various companies/entities of the UB Group
including KFA, he had exerted pressure on the aforementioned KMPs to comply
with his instructions and the same were complied with …. Similarly, in his
capacity as the Managing Director of USL during the period when funds were
diverted, Mr. Ashok Capoor was in charge of and was responsible to USL, for the
conduct of its business. It is therefore prima facie clear that Mallya, Mr.
Ashok Capoor alongwith the other KMPs were active in facilitating and/or had
knowledge of the diversion of funds from USL to the companies of the UB Group.
The individuals holding key managerial positions in such listed companies have
to follow high standards of integrity and ensure good governance. By diverting
substantial funds from USL to companies of the UB Group, Mallya and other KMPs
have engaged in an act or practice which prima facie operated as a fraud or
deceit on the public shareholder/investors of USL.
2.3       Mallya and the other KMPs i.e. Mr. Ashok
Capoor, Mr. P.A. Murali, Mr. Sowmiyanarayanan, Mr. S.N. Prasad, Mr. Paramjit
Singh Gill and Mr. Ainapur S.R. are therefore prima facie alleged to have
committed fraudulent and unfair activities prohibited under Section 12A(c) of
the SEBI Act , 1992 (“SEBI Act”) and Regulations 3(d); 4(1) alongwith 4(2)(e),
(f) and (k) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices)
Regulations, 2003 (“PFUTP Regulations, 2003”).
2.4       The alleged prima facie violations
observed in this case are serious and have larger implications on the safety and
integrity of the securities market. Investors might have based their investment
decisions on the manipulated books of accounts prepared and presented by these
persons. It would therefore not be in the interest of the securities market and
the interest of investors to allow persons of such doubtful demeanor to
continue to act as KMPs in the company or in other listed companies or allow
them to deal in the securities market. Therefore, pending investigations in the
matter, effective preventive and remedial actions needs to be taken against the
persons in order to safeguard the integrity of the securities market.
Accordingly, the facts and circumstances of the case necessitates the issuance
of this Ad Interim Ex-Parte Order. …
Accordingly, SEBI ordered that several
persons mentioned above are prohibited from buying, selling or otherwise dealing
in any securities, with two of them (Mr. Mallya and Mr. Capoor) being restrained
from holding position as directors or key managerial personnel of any listed
company. Finally, SEBI ordered that USL shall take steps to recover the amounts
which have been diverted (being Rs. 655.55 crores as mentioned in a report by
PWC-UK and Rs. 1225.24 crores mentioned in a report by E&Y).
Since this is an interim order, we may be
yet to hear the last word on this. Nevertheless, this order is an important
step not only in relation to the USL case, but also in relation to curbing
related party transactions (RPTs) in India generally. RPTs, if not carried out
properly, amount to transfer of value from listed companies to other entities
that may enrich the controlling shareholders at the cost of the minority
shareholders. There is evidence of such diversion, known in academic literature
as “tunneling”, even in the Indian context, as discussed in a paper by Bertrand, et al.
Hence, the regulation relating to RPTs has been considerably enhanced in
regulatory reforms culminating in the Companies Act, 2013 and the SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2015. In this context,
the USL case will be an important test to determine the robustness of the regulatory
framework governing RPTs in India and, more importantly, the effectiveness of
the enforcement of RPT regulation.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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