Analysts are puzzled how Palmer Investment Group Ltd, a British Virgin Island based subsidiary of United Spirits Ltd, came to own substantial amount of shares in its parent United Spirits Ltd.
According to Indian companies law, a subsidiary cannot hold shares of its parent except under specific circumstances which do not apply in USL’s case. Palmer Investment acquired 4.37 million shares or 3.35 per cent in USL on October 18, 2011 through an inter-se transfer.
These shares are part of the total 19.3 per cent USL stake proposed to be acquired by Diageo from four different entities. According to the deal structure, Diageo will acquire 12.8 per cent from UB Holdings, 3.35 per cent from Palmer Investment, 2.64 per cent from USL Benefit Trust and remaining from another USL subsidiary UB Sports Management.
In addition to these secondary sales by these four entities, Diageo will acquire a further 10 per cent through a preferential allotment from the company after which it will make an open offer for 26 per cent to minority shareholders, according to the deal structure announced last week.
Interestingly, Annual reports of financial year ending March 2011 and March 2012 of United Spirits showed Palmer Investment Group Ltd as a 100 per cent subsidiary. However, UB Sports Management does not appear in the subsidiary list of USL as of its last annual report. It does not appear in the last shareholding pattern filed with the exchanges as it holds less than 1 per cent. It is not clear at what point it became USL’s subsidiary, it is also not clear whether it owned these shares before it became a USL subsidiary.
If holdings of Palmer, UB Sports and USL Benifit are considered in the promoter category, as these aee group companies and promoter is authorised in selling stake held by these firms to Diageo, the shareholding of promoters will be over 33 per cent and not 27 per cent as is being disclosed currently.. This is another of disclosure that has raised eyebrows.
“Why despite being controlled by promoters indirectly, these entities do not appear as promoter group shareholders is also a matter that needs explanation? ,” says a legal expert.
Experts say inter-se transfer to a subsidiary is void under Section 42 of the companies act unless it is to the legal heir of a deceased shareholder. Emails and phone calls seeking comments from UB group spokesperson and group CFO did not elicit any response.
According to Section 42 of the Companies Act which deals with membership of holding company,“ Except in the cases mentioned in this section, a body corporate cannot be a member of a company which is its holding company and any allotment or transfer of shares in a company to its subsidiary shall be void.”
Laying down the exceptions to this rule subsection (2) of section 42 says, “Nothing in this section shall apply- (a) where the subsidiary is concerned as the legal representative of a deceased member of the holding company ; or (b) where the subsidiary is concerned as trustee, unless the holding company or a subsidiary thereof is beneficially interested under the trust and is not so interested only by way of security for the purposes of a transaction entered into by it in the ordinary course of a business which includes the lending of money.”
Experts say none of these exemptions apply as per publicly available information.
Pavan Vijay, founder, Corporate Professionals said, “Section 42 does not allow inter-se transfer. However, we need to check whether Palmer got these shares in its capacity as trustee and was holding it for the benefit of any other shareholder.”
Palmer became USL’s subsidiary in FY09 by virtue of a scheme of amalgamation between USL and Cyprus-based Zelinka Ltd. approved by Karnataka High Court on May 29,2008. Zelinka, itself an USL subsidiary, was used by USL to acquire Delaware based beverage maker Liquidity Inc in 2007.
