ED might summon USL officials to probe fresh fund-diversion charges

The Enforcement Directorate (ED), which is investigating cases of alleged fund diversion by United Spirits (USL) between 2007 and 2014, would soon seek all documents related to the Paradise Papers, and might even summon company officials to probe fresh charges, agency sources said.   

According to the new leak of financial documents by the International Consortium of Investigative Journalists (ICIJ) and The Indian Express, USL had used offshore subsidiaries to divert about Rs 9,700 crore to tax havens.  

After the leak was made public, the central government said on Monday that investigations related to the Paradise Papers would be monitored by a reconstituted multi-agency group, headed by the chairman of the Central Board of Direct Taxes (CBDT) and having representatives from the CBDT, the ED, the Reserve Bank of India (RBI), and the Financial Intelligence Unit (FIU).

The ED is currently investigating the transfer of funds from USL to its subsidiary based in the British Virgin Islands, a tax haven, in 2007, following the Karnataka High Court’s directive. 

ED sources said top USL officials – present as well as former – would be called again for questioning as soon as they got access to the Paradise Papers. 

According to the latest leak, the Diageo group had approached London-based law firm Linklaters LLP to simplify the complex group structure created by USL under its former chairman Vijay Mallya. Diageo had taken over the company in late 2012 and as part of the restructuring, Diageo absolved Watson Limited, an entity owned by Mallya in his personal capacity, of its dues to a USL group company to the tune of $5.8 million. Linklaters LLP then approached Appleby to help it get authorisations for the Mauritius-based Watson Ltd to complete the transaction.

The main reason for the complex holding structure created by Mallya was to divert funds through USL Holdings Ltd, and three subsidiaries in the UK — USL Holdings (UK) Ltd, United Spirits (UK) Ltd, and United Spirits (Great Britain) Limited (UK), the paper said. 

Documents from Appleby show that funds amounting to over $1.5 billion were diverted as debt into these four subsidiaries over a period of seven years till 2014. Diageo ended up waiving the $1.5-billion debt owed by these subsidiary companies but gave no explanation on why it waived such a huge amount. 

The ED’s summoning of USL officials in May last year was a follow-up to an ED letter dated October 29, 2015, in which the company had been asked to give information and documents regarding its present and former joint ventures and wholly owned subsidiaries abroad, including USL Holdings Ltd (BVI) and its subsidiaries. 

British liquor giant Diageo had taken over USL in 2012 in a $2.1-billion transaction. The proceeds of the sale were not used by Mallya to repay banks who were running from pillar to post to get back their loans worth Rs 9,100 crore to the Mallya-owned airline.  

USL had argued in the Karnataka High Court that the money was transferred for the acquisition of Whyte & Mackay in May 2007, in a deal worth around $1.2 billion. After Diageo took over USL, it sold Whyte & Mackay in 2014 at a 25 per cent discount to the 2007 acquisition price. The proceeds of the sale were not brought to India and were used to repay foreign loans, United Spirits, under its new management, had said. 

A Diageo spokesperson said, “While under the control of former chairman Mallya, USL advanced loans to subsidiaries. These intra-corporate loan arrangements pre-dated Diageo acquiring its interest in USL in July 2013. After Diageo took control of USL, all outstanding loan amounts have been disclosed and adequately provided for in company accounts, in accordance with applicable accounting principles.”

In its annual report for financial year 2015-16, United Spirits said in February 2016, certain directors of the company, including its independent directors, were requested to provide statements and information to the Serious Frauds Investigation Office (SFIO) in relation to an investigation into Kingfisher Airlines.

According to the company’s annual report dated March 31, 2015, USL had granted interest-free loans in foreign currency amounting to Rs 4,941 crore and Rs 4,793 crore in 2014 to USL Holdings Limited (BVI), a subsidiary, for acquisition of long-term strategic investments. These loans were given during the period of FY08 till FY15. 

While the Indian Express reported that United Spirits has waived off $1.5 billion remitted abroad, in a statement, Diageo said it has not waived the $1.5 bn debt as reported in the "Paradise Papers". "After Diageo took control of USL, all outstanding loan amounts have been disclosed and adequately provided for in the company accounts, in accordance with applicable accounting principles," said a Diageo spokesperson.