Mallya costs Diageo £100m in debt default

VJ Mallya, the non-executive chairman and former owner of India’s United Spirits, has cost Diageo $135m (£93m) by defaulting on a debt to Standard Chartered Bank, reports suggest.

United Spirits chairman Vijay Mallya (Photo: USL)

Standard Chartered declared the loan in default last May but agreed to extend the repayment period after Diageo guaranteed the loan. Mallya missed the second repayment deadline of January 29 and so Diageo has been forced to release money it lodged as a guarantee to the bank.

Diageo took control of USL in 2013. As part of that deal, a Diageo subsidiary, Diageo Holdings Netherlands BV, issued a guarantee to Standard Chartered. That allowed Mallya’s Watson Ltd to use the money to pay its debts to another bank. In turn, that allowed the release of USL shares which were to be acquired by Diageo as part of its takeover.

For facilitating the loan, Diageo received a counter-indemnity from Mallya, the effect of which was that he would repay Standard Chartered. If Mallya defaulted, Diageo could seek to recover the money from him. Previously Mallya has been declared a “wilful defaulter” by Indian courts over bank loans to his collapsed Kingfisher airline.

After the initial default on the $135m in May, Diageo asked Standard Chartered to extend the repayment deadline to January 29, 2016 and deposited $135m in an escrow account with the bank.

Now that Mallya has defaulted for a second time, Diageo has been forced to release the $135m to Standard Chartered.

Diageo seemingly has little option but to seek redress from Mallya through the courts. That may not be easy. A consortium of Indian banks has already obtained an order from the Karnataka High Court preventing the sale of United Breweries shares (Mallya’s main company), a ruling which Diageo has unsuccessfully challenged.

The Standard Chartered loan was granted on a guarantee of shares in stakes in the Force Indian Formula One team, which is jointly owned by Mallya. Diageo has now told America’s SEC that it fears that the Formula One stake may have lost its value and would not be enough to recover the $135m.

Mallya is taking the fight to Diageo by threatening to claim a counter-indemnity. Diageo, has told the SEC, that Mallya alleges 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.

Diageo says that it had no obligation towards Mallya, saying the agreement stipulated only that it would “consider” a joint venture with him in southern Africa. It will contest any counter-suit.

Meanwhile Diageo remains at loggerheads with Mallya, who it would very much like to remove as United Spirit’s non-executive chairman. The Diageo-controlled board demanded his resignation last summer after an internal inquiry alleged that Mallya had diverted £1.3bn from the spirits group to other companies including his defunct Kingfisher Airlines. Mallya refused to step down and presided at the annual meeting in January.

Those allegations are now under investigation by the Indian financial authorities.