USL board said its second forensic audit by EY has revealed fund diversion worth Rs 1,225 cr to Mallya companies.

With Diageo accusing former UB group chairman Vijay Mallya of fund diversion from United Spirits, corporate lawyers said it would be difficult for the British multinational to prove its case in a court of law and recover funds from Mallya entities. 

Hence, a protracted legal battle lies ahead for United Spirits to recover its funds worth Rs 1,200 crore (Rs 12 billion) from Mallya, say lawyers. 

According to lawyers, the regulators would conduct their own investigations considering the latest forensic audit report from EY as well as an earlier one by PWC in 2015 pointed towards financial irregularities in the company, but the earlier auditors had cleared the same accounts. 

“Considering the funds from United Spirits were transferred to Mallya entities with the full knowledge of the then board, auditors, shareholders and audit committee, it would be difficult to prove any wrongdoing by Mallya,” said RS Loona, managing partner of DV Alliance, a Mumbai-based corporate law firm.

“The big question now is whether this money can be recovered considering that most of the Mallya entities in India have defaulted,” he added.

The due diligence conducted by Deloitte LLP for Diageo in 2012 would also be questioned as they are supposed to look at these financial irregularities before the sale, lawyers said.

On Saturday, the USL board said its second forensic audit by EY revealed fund diversion worth Rs 1,225 crore to Mallya companies when the company was managed by Mallya.

What is surprising, lawyers said, that even after the PWC report in April last year, Diageo offered an additional $75 million to Mallya in February this year, which weakens the case of the British liquor giant.

“Why did Diageo offer more money to Mallya when it already had a forensic audit report saying money was siphoned off?” asked another lawyer who did not wish to be named. 

The Securities and Exchange Board of India, the Serious Fraud Investigation Office and the Enforcement Directorate are investigating present United Spirits officials as well as Mallya’s officials.

The issues were first raised when KPMG, the auditor, discovered various discrepancies while finalising USL’s 2014 accounts.

These issues were mentioned in USL’s notice to the stock exchanges dated September 4, 2014 and outlined the same in the notes to the published accounts.

This led to the USL board directing the company's new managing director, Anand Kripalu,  to conduct an inquiry.

The forensic audit conducted by PWC UK reported Rs 1,400 crore (Rs 14 billion) of fund diversion from USL.  But, Mallya trashed the PWC report saying Price Waterhouse itself was USL’s auditor when the alleged fund diversion took place. 

On Sunday, Mallya argued he was not aware of any EY investigation and was not given any opportunity to present his case.

“Neither USL nor EY has given me any details of the allegations or any opportunity to respond. I can only reiterate that all transactions were legal, above board and approved by USL auditors, the USL board and shareholders. Over and above this, Diageo conducted an extensive due diligence on USL prior to acquiring shares,” Mallya said.

ROLLER-COASTER RIDE

• Nov 2012: Diageo announces 25% stake buy in USL from Vijay Mallya
• July 2014: Diageo raises stake to 55%
• April 2015: USL asks Mallya to quit as chairman after PWC forensic audit finds fund diversion Mallya refuses to quit USL board
• Feb 2016: Mallya steps down from USL board after Diageo agrees to pay $75 mn
• July 2016: USL says EY report confirms fund diversion, Mallya trashes "one-sided" EY report