SEBI’s interim order against Vijay Mallya & six others

The Securities and Exchange Board of India (SEBI) has passed an interim order ‘restraining’ Vijay Mallya, former Chairman of United Spirits Limited (USL), from holding position as a ‘Director’ or ‘Key Managerial Person’ (KMP) of any listed company or to deal in securities market, along with six others..Six others include: Ashok Capoor, Managing Director, who has also been barred from being a director or KMP in a listed company; P.A Murali, Executive Director & CFO; Swomiyanarayanan, Assistant VP – Accounts; S.N. Prasad, Senior VP- Finance and Accounts; Paramajit Singh Gill, President, All India Operations and; Ainapur S.R., Divisional VP- Accounts..At the outset, this order, is a strong step towards curbing Related Party Transactions (RPT) in India. As noted in the order, one of the primary concerns of SEBI was compliance with Regulation 23 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015..As pointed out here, 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..SEBI took suo-moto cognizance of the matter following a public announcement made by USL in relation to the $75 million ‘Settlement Agreement’ struck between Diageo (parent entity) and Mallya in February, 2016. As per the terms of the Settlement Agreement, Mallya would be given a sum of $75 million to step down as the Chairman and Director of USL, and be relieved from any ‘civil/commercial claims’ arising out of the ‘Initial Inquiry Report’ which was submitted by PWC, UK in March, 2015, pertaining to years 2010-2013. The Initial Inquiry Report highlighted several lapses in the governance and, diversion of funds, at the behest of Mallya, following which the board of USL, in 2015, had asked Mallya to step down. Mallya, however, refused to do so, until parent entity Diageo stepped in. It is USL’s claim that,.“…..USL and its subsidiaries are not a party to this transactions and are not making any payments whatsoever to Dr. Mallya or his affiliates or relatives in this regard or as part of the settlement.”.The Settlement Agreement, which also involved termination of the Shareholder’s Agreement entered into between the parties in September, 2013 is being examined by SEBI separately which involves ‘change of control’..The diversion of funds from USL, which is the main issue involved in this order, was to certain UB Group companies, including in particular, KingFisher Airlines. The modus operandi, as disclosed by USL, for fund diversion was via Tie-up Manufacturing Units. As per submissions made by USL to SEBI,.“USL funds were initially provided by USL to its TMUs and these amounts were shown to be payments made for operational reasons e.g. advances or security deposits. The TMUs then forwarded the funds to certain intermediary companies who were part of or associated with the UB Group. These intermediary companies then forwarded the funds onto KFA”.Mallya, however, in a series of tweets has referred to these allegations as a ‘joke’ and said he is getting used to “witch hunts coming from all directions with no legal basis whatsoever”..In the 32 page order, SEBI Whole Time Member S Raman said the alleged prima facie violations, of various applicable laws, observed in the case are serious and have larger implications on the safety and integrity of the securities market. The accused have prima facie alleged to have committed fraudulent and unfair activities prohibited under provisions of the SEBI Act and provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003..Finally, SEBI ordered that USL shall take steps to recover the amounts which have been diverted (being ₹655.55 crores as mentioned in a report by PWC-UK and ₹1225.24 crores mentioned in a report by E&Y).