Mallya 'default' makes Diageo lose $135 million

Despite Reserve Bank of India governor Raghuram Rajan's veiled reference to Vijay Mallya for 'flaunting your birthday bashes despite owing the system lot of money', the message seems to have been lost on the businessman.

Diageo, the spirits firm that acquired a majority stake in Mallya's United Spirits Ltd (USL) in 2013, has told the US Securities & Exchange Commission (SEC) that Mallya has once again defaulted on a payment of $135 million to Standard Chartered Bank.

The payment was due on January 29 this year. This is the second time Mallya has refused to pay the money. The first deadline was May 2015.

Standard Chartered had categorised the loan as 'default' in May but had agreed to extend the repayment period after Diageo intervened and struck a deal with the bank.

The genesis of the default goes back to Diageo's integration with Mallya's USL in 2013. As part of the deal, a Diageo subsidiary named Diageo Holdings Netherlands BV (DHN) issued a guarantee to Standard Chartered.

The guarantee by Diageo enabled a Mallya-owned company, Watson Ltd, pay its debts to another bank after getting the money from Standard Chartered. This allowed the release of USL shares which were to be acquired by Diageo as part of its takeover of Mallya's spirits firm.

For facilitating the loan, Diageo got a counter-indemnity from Mallya. In effect, Mallya was to repay the money to Standard Chartered. If Mallya failed to repay, Diageo could initiate any measure to recover the money from him.

In May 2015, after the loan was classified as default, Diageo asked Standard Chartered to extend the deadline for repayment to January 29, 2016. Under the agreement, Diageo was to deposit $135 million in an escrow account with the bank.

If Mallya failed to repay again, Standard Chartered would take the money deposited by Diageo. With the loan still in default, Diageo released the entire amount to Standard Chartered.

With $135 million gone from its kitty, Diageo has little option but to follow through with its threat of dragging Mallya to court. So desperate is the situation that Diageo is at loggerheads with Indian banks, which are struggling to recover over Rs 7,000 crore from Mallya's Kingfisher Airlines.

The Standard Chartered loan was availed after giving a guarantee of shares of Mallya's United Breweries Ltd and Watson Ltd's stake in Force Indian Formula One team, jointly owned by Mallya and Sahara's Subrata Roy.

A consortium of Indian banks, led by SBI, has already obtained an order from the Karnataka High Court preventing the sale of UBL shares. Diageo has unsuccessfully challenged these orders in Indian courts till date.

Watson has stake in Mallya's F1 team through a Luxembourg-based company named Orange India Holdings, which is used by Mallya to exercise control over the F1 team he jointly owns with the now- incarcerated Subrata Roy.

Diageo has told SEC that it fears that the Formula One guarantee given to it may have lost its value and would not be enough to recover the $135 million it is claiming from Mallya.

Mallya has taken the fight to Diageo by threatening to claim a counter-indemnity. Diageo, in its filings before SEC, has said that Mallya is claiming that Diageo owes him the money for a joint venture business they entered in 2013 for brewing sorghum beer in South Africa.

The deal involved buying South Africa's United National Breweries. Mallya has claimed that the money was part of Diageo's commitments to him as part of the joint venture deal finalised by the two parties in 2013.

Diageo maintained that it had no obligation towards Mallya and has told its shareholders that it would 'contest' Mallya's claims. Diageo has been in a protracted battle with Mallya after an internal inquiry found that Mallya had diverted Rs 1,337 crore from his spirits firm to other group companies including Kingfisher Airlines.

Diageo's board has also made multiple attempts to boot out Mallya from the management but has failed to do so. Emails sent to Diageo & USL did not elicit a response at the time of going to press.