Diageo faces fresh headache with India drinks business

Diageo is facing a fresh headache from its £1.8bn acquisition of India's United Spirits, in the form of a stand-off with the company's former controlling shareholder and current chairman Vijay Mallya over allegations of past fund diversions.

At an emergency weekend meeting, the board of United Spirits, which is now 55 per cent owned by the British drinks group, asked Mr Mallya to step down as chairman after a probe found improprieties in financial transactions between the Indian spirits business and other parts of Mr Mallya's empire between 2010 and 2012.

During the period under scrutiny, Mr Mallya was attempting to save Kingfisher Airlines, trying - ultimately unsuccessfully - to keep his popular but money-losing carrier aloft.

"The inquiry…suggests that the manner in which certain transactions were conducted, prima facie, indicates various improprieties and legal violations," Anand Kripalu, United Spirits' recently appointed managing director, said in a letter to the Bombay Stock Exchange.

The letter said that in light of the findings - though "without making any determination as to fault or culpability" - the board had "lost confidence" in Mr Mallya as either chairman or director of United Spirits and called for him "to resign forthwith".

Mr Mallya rejected the demand, defiantly describing the conclusions of the probe as based on "half truths and twisted facts".

In his statement, the Indian tycoon denied any wrong-doing. He said the transactions under scrutiny were in "full compliance of law at the relevant time," were reflected in United Spirits accounts, and were duly approved by then-shareholders and directors.

Mr Mallya also said Diageo had spent four months conducting due diligence before acquiring United Spirits and that "details of all transactions were disclosed to them." It was therefore "surprising" these deals were now being cited as a cause for him to step down from the board, he said.

"I do not intend to resign as a director of United Spirits Ltd, and shall pursue the contractual obligations with Diageo PLC," Mr Mallya said in his statement.

In a subsequent tweet to his 3.5m followers on Twitter, Mr Mallya said: "I am not going to submit myself to a trial by media. I know the facts and so do all with fiduciary responsibilities. I have legal rights too."

Diageo spent years in on-again, off-again negotiations with the mercurial Mr Mallya before finally reaching a deal to acquire India's largest spirits producer in 2012. However, it was not until last July that Diageo finally secured majority control with the successful conclusion of an open tender offer that boosted its holding from a previous 28 per cent.

United Spirits' financial results for the quarter immediately after that transaction were repeatedly delayed amid questions over a $225m loan the Indian spirits business had made to its former parent company, controlled by Mr Mallya.

In September, the United Spirits board said it was authorising an investigation into whether funds had been "improperly advanced" to Mr Mallya's holding company or Kingfisher Airlines before Diageo's takeover.

Mr Mallya has promised to challenge the findings of the probe and resist effort to oust him. However, Mr Kripalu's letter said that United Spirits directors will recommend to shareholders that Mr Mallya be removed from the board if he refuses to step down

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