In an ever-fracturing relationship between Diageo and Vijay Mallya, the last big headline was that the United Spirits Limited (USL) Board had asked Vijay Mallya to step down as Chairman.
However, recent disclosures have raised new questions about the open offer price paid by Diageo when it first did the acquisition.
Proxy advisory firm Stakeholders Empowerment Services (SES) says the open offer price did not include certain benefits to Vijay Mallya. More specifically, these facts were hidden from the Securities and Exchange Board of India (Sebi).
Speaking to CNBC-TV18’s Menaka Doshi, SES Founder and Former ED at Sebi JN Gupta says that the shareholders were unaware of the attached transactions related to the purchase.
Below is the transcript of JN Gupta’s interview with Sonia Shenoy and Menaka Doshi on CNBC-TV18.
Menaka: The open offer price when the acquisition first happened, was Rs 1,440. You are saying that that price is in some ways is fiction because there were other benefits to Vijay Mallya that Diageo had promised or indirect benefits to Vijay Mallya that Diageo will now have to deliver on which ought to have been factored into the open offer price. The first one you allude to is a guarantee, a bank guarantee that Diageo gave to a Mallya entity called Watson. And Watson was going to use that money to relieve the lien on certain USL shares that it had owned so that it could sell those shares in turn to Diageo. That bank guarantee is about to be invoked you are saying?
Menaka: Can you give us more details on why you think that is not priced into the open offer?
A: The whole objective of the takeover code that Sebi is has set is that it had to be fair, transparent and give a treatment to the shareholder at least the same, if not more that has been given.
Menaka: So, that is accepted. Why are you saying that the price does not reflect the bank guarantee?
A: Why we are saying this is because when those shares were bought by Diageo, they were earlier pledge to a lender under a facility to whatever it may be.
Diageo agreed to extend a bank guarantee to release those shares and purchase those shares. So, what happens, when you issue a bank guarantee; you have a cost, which is a very nominal cost of the bank guarantee commission or foregoing on the interest.
But the bigger issue in a bank guarantee is the contingent liability that may arise out of the invocation of the bank guarantee. As is the case, which Diageo has mentioned in annual report, that there is a likelihood that they will not be able to recover this cost from that. They will not be able to recover this money from Mallya.
Menaka: So, essentially, the bank guarantee that they had given to a Mallya entity is about to be invoked because that loan for which they had guaranteed, the Mallya entity has defaulted on that loan. It is a USD 135 million loan and Mallya has defaulted on the loan, so there is a good chance that this bank guarantee will be invoked and therefore this money will have to go from Diageo’s pockets. You are saying it should be accounted for as part of the acquisition price.
A: My point is this. I have been a banker myself. When you give a bank guarantee, you give bank guarantee for a purpose and especially in a bank guarantee which is given for the third party where you have no control, then there has to be very strong logic for that. So, first of all, Diageo and Mallya, they never disclose to the regulator or to the public at large, that there was a underlying transaction.
Menaka: But, they did disclose in the 2013 annual report that such a bank guarantee had been extended, right?
A: The open offer disclosure was made on November 10, 2012 and that time all these things were already decided by that party that this will be the procedure.
Menaka: But, how do you expect Diageo, the acquirer in 2012 to know that a bank guarantee that it was offering an affiliate entity of Vijay Mallya was ultimately going to get invoked in 2015 because Mallya was never going to pay that money?
A: I am not at all arguing it.
Menaka: So, how could they have factored it into the open offer price?
A: My point is this. First they should have disclosed it. Secondly look into the circumstances. A person does not mortgage or pledge his shares unless and until there is a financial difficulty.
If you are selling those very shares which have got released from using my guarantee, why did you not pay the same money which you got it from me to release the bank guarantee also? Why it has to be double financing for the same very shares.
It is like this that I am buying a house which has been mortgaged by the seller to a bank. First I give a guarantee to the bank to release the mortgage and pay the same money for the same house, so that means the person is having money also.
Menaka: So, you are saying Diageo paid twice for those shares technically?
A: Now, coming to when that guarantee has been invoked, it is proof that they are paying twice.
Menaka: But, in the disclosures Diageo does say that it is a complex process of the guarantee being invoked and therefore what the contingent liability or USL or Diageo’s books will be in that sense, so it is not necessary that the full amount of USD 130 million will be paid by Diageo.
A: You have brought a very interesting fact into this because if you see the full disclosure of Diageo, it is Mr Mallya who is disputing everything. He says that Diageo has promised certain financial benefits to me and Diageo has failed.
Menaka: So, that is your second point of contention?
Menaka: That those certain financial benefits nobody knows what they were or what they are, have not been accounted for in the open offer price. These are all disclosures that are coming out in the open only now and indicate that there are indirect benefits to Mr Mallya which should have been priced into the open offer.
A: So, the whole deal was an integral thing. As things are unfolding now, it appears that Rs 1,440 was just the naked price that was paid. Attached to that was the bank guarantee issue.
Attached to that was the financial benefits that were promised to Mr Mallya which Mr Mallya is saying that Diageo did not fulfill and that is why the fight.
As far as I am concerned, I do not care what their fight is. But look at the shareholders who should have been told that these are the attached transactions related to the purchase.
Menaka: But tell me one thing. You are a former ED of Sebi. Are not these details supposed to be filed by acquirers with the regulator so that the regulator can scrutinize the open offer price and determine whether the public is being offered the same price as the exiting promoter or the exiting owner?
A: That is precisely we are questioning. We are saying that all the things were hidden from the regulator. Had these things been brought to the regulators knowledge, probably they would have factored all these things or may not have factored. That would be a decision that would have been taken looking into the whole things.
But today, I am saying first all these things were doe, secondly, they were hidden from the regulator and now, the thing in my opinion only on those portion or those shares which were pledged by Watson and which were released, those Rs 900 crore liability has to be attached and the price to be worked out.
And if the price comes out to be Rs 3,000 or Rs 4,000 whatever it may be, that price should be deemed as a price which was paid to Mallya and Company and now, in that open offer only 66,000 people had 66,000 share tender.
So, the offer failed because of the price. A regulator should say that whatever the maximum number of shares that were to be acquired multiplied by the gap in the price should be deposited by Sebi as a investor production fund so that in future such things do not happen.
Menaka: But shareholders do not get to benefit at this point in time by a higher price?
A: I agree direct shareholders may not benefit. Maybe 66,000 shares which were purchased may benefit. But long time, shareholders benefit need not be 1:1. As long as we are able to remove all such things for future transactions, it is benefit of shareholders.
Menaka: I was talking to some lawyers about your report and the key feedback I got from them is that it would be very difficult for an acquirer at the point of acquisition to determine whether a future or a bank guarantee is likely to devolve in the future and therefore that amount should be added to the acquisition price, it will be equally difficult for the regulator to determine that but on the point of disclosures almost all of the lawyers I spoke to said why weren’t these disclosures made at the time of acquisition, what are these financial benefits that have been promised to Vijay Mallya which Mallya is claiming today and why wasn’t all of this revealed to the regulator as well as shareholders. So, the question mark on whether Rs 1440 is the actual deserved open offer price or a piece of fiction remains?
A: To me it remains. I agree that it may not be, but those people who were doing the transactions are not naive, they are experts and they knew what transactions they are entering into and when you enter in a transaction of undoing the pledge and paying the same money and for the same shares you are paying the money also and guarantee also, I don’t think any rational person will do.
Menaka: When the new takeover code took away that whole opportunity for promoters to get paid a premium- a control premium as it was in the earlier era, there was a fear that acquirers and promoters would find indirect ways to give the promoter some slightly better benefits, higher prices than shareholders would get. What JN Gupta seems to be indicating is that those were the kind of indirect benefits that have accrued to Vijay Mallya which other shareholders did not get.
Sonia: You said that attached transactions should have been in some way disclosed to shareholders but how do you as a minority shareholder protect yourself from things like these?
Gupta: For protection of minority shareholders organisation like Sebi is there. Sebi has to make sure that all disclosures are made, leading questions are generally asked but here is a transaction which Sebi would not have known what is happening because Sebi will not act as a forensic accountant to go into each and every transaction.
However the merchant banker were aware because when you are doing a transaction that what shares are being sold, the moment you say that these shares are at present pledged to XYZ and these shares will be released then the question comes that how they are going to be released where is the money for that?
When this question would have been raised it would have immediately come that Diageo is extending a bank guarantee to that. Any person who is associated with the transaction, I am not ready to believe that he or she was not aware what is the entire contour of the transaction.