Bangalore: Diageo Plc., the world’s largest distiller, is tightening corporate governance practices at United Spirits Ltd (USL) and the UK-based company has hired a consulting firm to vet USL’s contracts with other UB Group companies to ensure these agreements are “arm’s length transactions”.
Deloitte, which has been working with USL on various projects, has been asked to ensure that the terms of USL’s contracts with United Breweries Holdings Ltd (UBHL), the UB Group’s holding company, and other group firms, do not give an unfair advantage to these companies, according to two people familiar with the matter.
According to USL’s annual report, the company had financial dealings with UBHL worth over Rs.1,000 crore in the previous financial year. These transactions included buying and selling of goods, loans, deposits and advertisement and sales promotion expenses. USL was owed Rs.1,188.7 crore by UBHL as on 31 March 2013, according to the annual report. USL, India’s largest liquor maker, also gave loans and deposits to a “group company” worth Rs.1,318.6 crore, the report showed.
Both USL and Deloitte declined to comment.
Diageo, which completed its purchase of a 25.02% stake in USL last July has made compliance to both laws and company policy and installing its global business practices at USL one of its biggest priorities at the Bangalore-based company.
Mint reported on 21 August that Diageo removed as many as 100 UB Group executives off USL payrolls as many of these executives were employed by other UB Group firms, including the grounded Kingfisher Airlines Ltd. The executives were later transferred to UBHL.
The removal of UB Group executives off the payrolls and the vetting of contracts with UB companies are seen as moves by Diageo to distance USL from the larger UB Group.
Mallya and his firms control less than 10% of USL now, while Diageo is by far the largest shareholder at USL after building up a stake of nearly 30%, partly by buying shares on the stock market over the past few months.
Diageo, which negotiated the right to appoint the chief executive and chief financial officer at USL as part of the deal, named Anand Kripalu as the CEO designate in October. Kripalu will take over as CEO from April, replacing Ashok Capoor. Late last year, Ashoke Roy, former chief financial officer at USL’s unit Whyte and Mackay, was appointed as the head of USL’s compliance and ethics team.
Last week, Diageo put in place a new code of conduct for USL employees, replacing USL’s eight-year old code. The new code of conduct is comprehensive, covering all aspects of USL’s business including accounting, marketing, dealing with government officials, health policy, entertainment expenditure by executives and other things. Over the past few months, the ethics and compliance team has been training USL employees on the code.
“USL is committed to setting and upholding the highest standards of compliance and governance,” said Roy, deputy president—compliance, ethics and internal audit.
“At a minimum, the (new) standards comply with Indian and international laws, at times, even exceeding the requirements. We believe adherence to both the letter and spirit of these standards will be a competitive advantage,” Roy said in an email through a spokesperson.
Separately, N.R. Rajsekher, chief operating officer of south India (excluding Andhra Pradesh) at USL, is retiring from the company, according to two people familiar with the matter, including one of the two cited above. Matthew Xavier, chief operating officer of the Andhra Pradesh region of USL, is likely to replace Rajsekher, the people said.
Rajsekher, a UB Group veteran, is one of the highest-paid USL executives.
[Live Mint, MAR 06 2014]