USL fund diversion case: Sebi bans Mallya from accessing capital markets

Three year market ban; Five year ban from taking directorship in listed companies

The Securities and Exchange Board of India (Sebi) on Friday banned beleaguered businessman Vijay Mallya from accessing capital markets for a period of three years in the United Spirits (USL) fund diversion case. The market regulator also barred Mallya and six top USL officials including Ashok Capoor, former president and managing director, from taking directorship position in listed companies.

The case pertains to diversion of Rs 6.6 billion from USL to Mallya-led UB Group companies between 2010 and 2013. Sebi had passed an interim order in the matter in January last year. The order was challenged by Mallya and others before the Securities Appellate Tribunal (SAT). The final order in the matter was passed on Friday by Sebi whole-time member G. Mahalingam.

Mallya and others (noticees) had contested Sebi’s interim order stating that it was based on a report of a forensic audit, commissioned by Diageo and conducted by PwC, rather than on the basis of its own investigation.

In its submission to Sebi, the liquor baron also said his “relationship with USL and with Diageo, after Diageo acquired a controlling interest in USL, has been acrimonious and adversarial and any representations made by USL and reports prepared at the behest of USL must necessarily be tainted as being inherently biased.”

The market regulator in the final order said, “It is relevant to note that Sebi has not relied solely on the PWC report, as contended by the noticees, but also on various items like the information elicited by Sebi from the company, the reports, responses, disclosures to stock exchanges, the observations in statutory audit report and annual report of the company and internal emails/letters, as detailed in the interim order.”

Sebi said the statements and findings in the PW report were otherwise substantiated or corroborated by other independent information. Hence, “the reliance placed on the third party report cannot be said to be improper.”

Sebi also said it is a widely followed practice that forensic investigations relating to accounting frauds are being done by qualified accountants. “There is no mandate that every action of the regulator needs to originate from its own investigation or examination,” Sebi said.

The regulator in its final order said all the third-party investigations were verified and factually confirmed. In the order, Sebi has illustrated the money trail from USL to Mallya-controlled companies under the UB banner.

Regulator said the principal of natural justice was followed in this case as all the noticees were provided with copies of the PwC report and they were given sufficient opportunities through personal hearings and written submissions to defend their case effectively.

“It is amply clear that Mallya exerted pressure on the employees of USL to provide funds to UB Group entities directly and indirectly,” the Sebi order says adding that the diversion of funds from USL adversely affected the balance sheet of USL.

Sebi has charged Mallya and Capoor under Sebi’s Prevention of Fraudulent and Unfair Trade Practices Act (PFUTP).

“It is inevitable that Sebi should step in and take appropriate action against the entities responsible for such misdeeds to maintain the integrity of the securities market as well as to protect the interests of the investors in the securities market,” the order says.