Doubts linger over USL, Diageo deal structure

Last Updated: Fri, Nov 16, 2012 19:50 hrs

Analysts are puzzled over how Palmer Investment Group Ltd, a British Virgin Island-based subsidiary of United Spirits Ltd (USL), came to own a substantial amount of shares in its parent. According to the Companies Act, a subsidiary cannot hold shares of its parent except under specific circumstances, which incidentally 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 (transfer of shares among group companies).

These shares are part of the 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 the remaining from another USL subsidiary called UB Sports Management.

According to the deal structure announced last week, in addition to these secondary sales by these four entities, Diageo will acquire 10 per cent through a preferential allotment from the company. Thereafter, it will make an open offer for 26 per cent to minority shareholders.

Interestingly, USL’s annual reports of FY11 and FY12 showed Palmer Investment Group Ltd as a 100 per cent subsidiary. However, as of its last annual report, UB Sports Management does not appear in the subsidiary list of USL. It does not appear in the last shareholding pattern filed with the exchanges either, as it holds less than one per cent. It is not clear at what point it became a USL subsidiary. Nor is it clear whether it owned these shares before it became a USL subsidiary.

If the holdings of Palmer, UB Sports and USL Benefit are considered in the promoter category as these are group companies and the promoter is authorised to sell stakes held by these firms to Diageo, then the shareholding of promoters will be 33 per cent and not 27 per cent as is being disclosed currently. This is another disclosure that has raised eyebrows.

According to a legal expert, another matter that needs explanation is why these entities don’t appear as promoter group shareholders, despite being controlled by promoters indirectly.

Responding to an email questionnaire, a UB Group spokesperson said, “Palmer and UB Sports are subsidiaries of USL, which were holding shares in Shaw Wallace & Company Limited (SWCL) (that) became shareholders of USL, consequent to the amalgamation of SWCL with USL. As the scheme of amalgamation (scheme), which contained the fact that these subsidiaries will hold shares in the holding company was sanctioned by the high courts of Karnataka and Calcutta and, therefore, the subsidiaries are permitted to hold shares in the holding company. Neither the inter-se transfer nor Palmer’s holdings being part of 19.3 per cent is a violation of the Companies Act.”

The spokesperson also said that proper disclosures regarding shareholding pattern were made to stock exchanges. “Under the takeover and other applicable regulations, only promoter’s holdings are required to be disclosed separately. These subsidiaries being persons acting in concert (PAC), their shareholdings are not required to be disclosed as part of promoters’ holdings. Hence, there is no violation of any regulation or listing requirements.

Legal advisor and former executive director with Securities and Exchange Board of India (Sebi), Sandeep Parekh, said: “The term PAC is relevant during acquisition purpose and not if the purpose is the sale of shares. You cannot say you are a PAC at the time of sale of shares as you are part of the promoter group. Also, the law is clear that no subsidiary can hold shares of the parent company and any inter-se transfer of shares to a subsidiary by the parent is just not permitted under Section 42 of the Companies Act.”

According to experts, 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. Moreover, USL’s balance sheet for financial year 2008-09 clearly says that Palmer became USL’s subsidiary in FY09 by virtue of a scheme of amalgamation between USL and Cyprus-based Zelinka Ltd approved by the Karnataka High Court on May 29, 2008. Zelinka itself was a USL subsidiary used by USL to acquire Delaware-based beverage maker Liquidity Inc. in 2007.

Section 42 of the Companies Act, which deals with membership of holding company, says, “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.”

According to experts, none of these exemptions applies as per publicly available information.

“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,” said Pavan Vijay, founder, Corporate Professionals.


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