The Department of Revenue (DoR) has not supported a proposal of United Breweries Holdings (UBHL) to raise Rs 708 crore through issuing convertible warrants to FirStart Inc in British Virgin Islands.
FirStart's entire paid up capital is held by Lalitha Mallya, mother of Vijay Mallya, and is part of the promoter group.
According to highly placed sources, DoR is believed to have informed this to the Foreign Investment Promotion Board (FIPB). Based on the facts available and the submissions made by the applicant, "DoR doesn't support the proposal."
Vijay Mallya promoted UBHL had sought post-facto approval from FIPB for issuing 63.87 lakh convertible warrants of Rs 1,110 each to FirStart for raising Rs 708 crore, but the board had deferred the decision on proposal.
DoR's comments were sent to FIPB for its June 19th meeting which was slated to discuss the UBHL proposal.
The FIPB decision on the proposal could not be ascertained.
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And the UB spokesperson declined to comment.
Sources said the DoR has not supported the proposal on various grounds, including that FirStart has already raised Rs 600 crore as loan. It has paid UBHL only Rs 267.82 crore as upfront money and for converting 19.71 lakh warrants into shares, and has Rs 332.28 crore left with it.
FirStart now says that it cannot raise money and will forfeit the 10 per cent amount paid relating to the balance 44.15 lakh warrants.
Sources said UBHL has informed DoR, "FirStart Inc is not in a position to bring the balance amount of Rs 441.14 crore for the conversion of 44.15 lakh warrants and will forfeit the 10 per cent amount paid."
Out of the proposed Rs 708 crore, FirStart Inc already paid Rs 70.89 crore, 10 per cent upfront when 62.87 lakh were issued to it in December 2007 and an amount of Rs 196.92 crore was paid in when 19.71 warrants were converted into shares in January 2008.
DoR has said that the security given for money raised by FirStart with the guarantee of Vijay Mallya and "lien on warrants shows that gap between the net worth of Rs 522 crore of Vijay Mallya and amount raised of Rs 600 crore is not explained as it is not able to subscribe the balance warrants now".
DoR also noted that UBHL has informed it that promoters have not decided as to how FirStart will repay the loan.
"In the event of default by FirStart, Vijay Mallya as guarantor has to repay the amount. Since Vijay Mallya's net worth is India based, the Indian funds eventually will be in effect the source of funds for investments by FirStart," it said.
Sources said DoR has asked Department of Economic Affairs (DEA) and Department of Industrial Promotion and Policy (DIPP) to examine the proposal, in which UB sought the permission for making downstream investments.