United Spirits Ltd. - Quarterly/Annual Result Disclosures and Notes dated 31 Dec 2018
Auditor and Management Disclosures and Notes for the quarterly results dated 31 Dec 2018
1. United Spirits Limited ('the Company') is engaged in the business of manufacture, purchase and sale of beverage alcohol (spirits and wines), including through tie-up manufacturing and through strategic franchising of some of its brands. The Executive Committee of the Company (being the chief operating decision maker) assesses performance and allocates resources for the business of the Company as a whole and hence the management considers Company's business activities as a single operating segment (viz. beverage alcohol).
2. This Statement has been prepared in accordance with the Companies (Indian Accounting Standards) Rules, 2015 (as amended) prescribed under Section 133 of the Companies Act, 2013 and other recognised accounting practices and policies to the extent applicable.
Effective April 1,2018, the Company has adopted Indian Accounting Standard 115 (Revenue from contracts with customers). The new standard is based on the principle that revenue is recognised when control of goods or services is transferred to the customer and provides a single, principles based five-step model to be applied to all sales contracts. It replaces the separate models for goods, services and construction contracts under previous standards (Indian Accounting Standard 11 and Indian Accounting Standard 18) which was based on the concept of transfer of risks and rewards. It also provides further guidance on the measurement of sales on contracts which have discounts and rebates by applying variable consideration principles.
Based on the evaluation of commercial arrangements with customers, the Company has identified certain discounts/rebates/ incentives to customers which need to be accounted upfront. The Company has applied the Standard from April 1, 2018 and has adjusted the cumulative effect of adoption of Indian Accounting Standard 115 aggregating to INR 374 million (net of tax amounting to INR 198 million) in the Retained earnings as at April 1, 2018. The impact on account of adoption of the Indian Accounting Standard 115 on the results for the quarter and nine months ended December 31, 2018 is not material.
3. Additional Inquiry
As disclosed in the financial statements for the years ended March 31, 2017 and March 31, 2018, upon completion of the Initial Inquiry which identified references to certain additional parties and certain additional matters, the MD & CEO, pursuant to the direction of the Board of Directors, had carried out an additional inquiry into past improper transactions (,Additional Inquiry') which was completed in July 2016 and which, prima facie, identified transactions indicating actual and potential diversion of funds from the Company and its Indian and overseas subsidiaries to, in most cases, Indian and overseas entities that appear to be affiliated or associated with the Company's former non-executive Chairman, Dr. Vijay Mallya, and other potentially improper transactions. All amounts identified in the Additional Inquiry have been provided for or expensed in the financial statements of the Company or its subsidiaries in prior periods. At this stage, it is not possible for the management to estimate the financial impact on the Company, if any, arising out of potential non-compliances with applicable laws in relation to such fund diversions.
4. Subsidiaries Rationalisation
a) In relation to its subsidiaries and pursuant to its strategic objective of divesting non-core assets which began with the divestment of Bouvet Ladubay SAS, Chapin Landais SAS and United Spirits Nepal Pvt Ltd, the Company has reviewed its subsidiaries' operations, obligations and compliances, and made plans for their rationalisation through sale, liquidation or merger ("Rationalisation Process").
b) During the quarter ended September 30, 2018, the Company entered into an agreement for the sale of its entire 51% equity holding in Liquidity Inc. and has sought approval of regulatory authorities for divesting its stake in Liquidity Inc., as well as for liquidating two of its wholly owned overseas subsidiaries, United Spirits Trading (Shanghai) Company Limited and Montrose International SA. During the quarter ended December 31, 2018, the Company has also sought regulatory approval in respect of liquidating its wholly owned subsidiary, USL Holdings Limited including its three wholly owned step-down overseas subsidiaries. The completion of the above sale as well as liquidations by the Company are subject to regulatory and other approvals (in India and overseas). During this Rationalisation Process, if any historical non-compliances are established, the Company will consult with its legal advisors, and address any such issues including, if necessary, considering filing appropriate compounding applications with the relevant authorities. At this stage, it is not possible for the management to estimate the financial impact on the Company, if any, arising out of potential non-compliances if any, with applicable laws.
c) On January 16, 2019, the Company completed the sale of its entire equity shares held by the Company in its wholly owned subsidiary Four Seasons Wines Limited (FSWL) along with wine brands and FSWL's interest in its associate Wine Society of India (WSI), to Quintella Assets Limited and Grover Zampa Vineyards Limited. The shares were sold for a total sale consideration of INR 319 million. Following the completion of this sale, the Company does not hold any shares in FSWL or WSI and FSWL has ceased to be a subsidiary of the Company. Also refer Note 10.
5. Loan to United Breweries (Holdings) Limited ('UBHL')
As disclosed in the financial statements for the years ended March 31, 2015, March 31, 2016, March 31, 2017 and March 31, 2018, the Company had pre-existing loans/ deposits/ advances/ accrued interest that were due to the Company and its subsidiaries from UBHL and its subsidiaries aggregating to INR 13,374 million and that were consolidated into, and recorded as, an unsecured loan through an agreement entered into between the Company and UBHL on July 3, 2013 ('Loan Agreement'). The Company has already made provision in prior financial years for the entire principal amount due, of INR 13,374 million, and for the accrued interest of INR 846 million up to March 31, 2014. The Company has not recognised interest income on said loan aggregating to INR 5,971 million for the period from April 1,2014 to December 31, 2018 (including INR 317 million and INR 951 million for the quarter and nine months ended December 31, 2018 respectively). The Company has offset payable to UBHL under the trademark agreement amounting to INR 82 million and INR 245 million for the quarter and nine months ended December 31, 2018 respectively against the aforesaid loan and other receivable from UBHL. The cumulative offset up to December 31, 2018 amounted to INR 1,276 million which comprises of interest on aforesaid loan aggregating to INR 846 million, loan receivable of INR 211 million and other receivable from UBHL aggregating to INR 219 million. Consequently the corresponding provision for interest, loan and other receivable has been reversed to 'Other Income' in the relevant periods, to the extent of aforesaid offset.
Since UBHL had defaulted on its obligations under the Loan Agreement, the Company sought redressal of disputes and claims through arbitration under the terms of the Loan Agreement. On April 8, 2018, the arbitral tribunal passed a final award against the Company. The reasons for this adverse award are disputed by the Company, and the Company has obtained leave from the High Court of Karnataka to file a challenge against this arbitral award. The Company has on July 6,2018 filed the petition challenging the said award before the Jurisdictional Court in Bangalore (the "Court"). The Court has issued notice pursuant thereto on the Official Liquidator and the hearing has commenced. Notwithstanding the arbitration award, based on management assessment supported by an external legal opinion, the Company continues to offset payable to UBHL under the trademark agreement against the balance of loan receivable from UBHL.
6. Excess managerial remuneration a) The managerial remuneration for the financial year ended March 31, 2015 aggregating INR 63 million and INR 153 million to the Managing Director & Chief Executive Officer ('MD & CEO') and the former Executive Director and Chief Financial Officer ('ED & CFO'), respectively, was approved by the shareholders at the annual general meeting of the Company held on September 30, 2014. The aforesaid remuneration includes amounts paid in excess of the limits prescribed under the provisions of Schedule V to the Companies Act, 2013 by INR 51 million to the MD & CEO and by INR 134 million to the former ED & CFO. Accordingly, the Company applied for the requisite approval from the Central Government for such excess remuneration. The Central Government, by letters dated April 28, 2016 did not approve the Company's applications. On May 24, 2016 the Company resubmitted the applications, along with detailed explanations, requesting the Central Government to reconsider approving the waiver of excess remuneration paid. In light of the findings from the Additional Inquiry, by its letter dated July 12, 2016, the Company withdrew its application for approval of excess remuneration paid to the former ED & CFO and has filed a civil suit before the jurisdictional court to recover the sums from the former ED & CFO. Consequent to the notification of Section 197(17) of the Companies Act, 2013 effective September 12, 2018, the pending application of MD & CEO resubmitted to the Central Government seeking approval automatically stands abated. The Company has, during January 2019, secured the requisite approval from shareholders by way of postal ballot exercise approving the waiver of excess remuneration paid to MD & CEO.
b) Certain amendments have been carried out, inter alia, to Section 198 and Schedule V of the Companies Act, 2013 ("Act") by way of the Companies (Amendment) Act, 2017, which are effective from September 12, 2018 ("Amendments"), relating to the remuneration payable to directors by a company. The Company has negative free reserves and accumulated losses of approximately INR 26,580 million as of March 31, 2018. Pursuant to these Amendments, the accumulated losses of a company are required to be set off against the profits in a given financial year while calculating the profit of the Company for such financial year under Section 198. Consequent to the aforesaid amendments, the profit of the Company (calculated in terms of Section 198) is expected to be negative for the financial year ending March 31,2019. As a result, remuneration paid and payable to Executive Directors may exceed the limits as per Schedule V read with Section 197 of the Act for the year ending March 31, 2019 and remuneration payable to Non-executive Directors is likely to exceed the limits as per Section 197 both read with Section 198 as amended.
The Company has, during January 2019 secured the requisite approval of the shareholders by way of postal ballot exercise for the remuneration paid! payable to the Executive Directors and remuneration payable to Non-executive Directors for the financial year ending March 31,2019, March 31,2020 and March 31, 2021 or till the end of the Directors tenure of appointment! reappointment, whichever is earlier, notwithstanding that such remuneration may exceed the limits specified under Section 197 and Schedule V of the Companies Act, 2013 as amended.
7. Regulatory notices and communications
The Company has previously received letters and notices from various regulatory and other government authorities as follows:
a) as disclosed in the financial statements for the years ended March 31, 2016, March 31, 2017 and March 31,2018, from the Securities Exchange Board of India ('SEBI'), in relation to the Initial Inquiry, Additional Inquiry, and matters arising out of the Agreement dated February 25,2016, entered into by the Company with Dr. Vijay Mallya to which the Company has responded. No further communications have been received thereafter;
b) as disclosed in the financial statements for the years ended March 31, 2016, March 31, 2017 and March 31,2018, from the Ministry of Corporate Affairs ('MCA') in relation to its inspection conducted under Section 206(5) of the Companies Act, 2013 during the year ended March 31, 2016 and subsequent show cause notices alleging violation of certain provisions of the Companies Act, 1956 and Companies Act, 2013, to which the Company had responded. The Company had also received a letter dated October 13, 2017 from the Registrar of Companies, Karnataka (the 'Registrar') inviting the Company's attention to the compounding provisions of the Companies Act, 1956 and Companies Act, 2013 following the aforesaid show cause notices. During the year ended March 31,2018, the Company filed applications for compounding of offences with the Registrar in relation to three show cause notices, applications for adjudication with the Registrar in relation to two show. cause notices, and requested the Registrar to drop one show cause notice based on expert legal advice received. The Company is awaiting a response from the Registrar to the aforesaid applications. The management is of the view that the financial impact arising out of compounding/ adjudication of these matters will not be material to the Company's results;
c) as disclosed in the financial statements for the years ended March 31, 2016, March 31, 2017 and March 31, 2018, from the Directorate of Enforcement ('ED') in connection with Agreement dated February 25, 2016, entered into by the Company with Dr. Vijay Mallya and investigations under the Foreign Exchange Management Act, 1999 and Prevention of Money Laundering Act, 2002, to which the Company had responded. No further communications have been received thereafter; and
d) as disclosed in the financial statements for the year ended March 31,2017 and March 31, 2018, from the Company's authorised dealer banks in relation to certain queries from the Reserve Bank of India ('RBI') with regard to: (i) remittances made in prior years by the Company to its overseas subsidiaries; (ii) past acquisition of the Whyte and Mackay group; (iii) clarifications on Annual Performance Reports ('APR') submitted for prior years; and (iv) compliances relating to the Company's overseas Branch office, to all of which the Company had duly responded.
8. Dispute with a bank
As disclosed in the financial statements for the years ended March 31, 2015, March 31, 2016, March 31, 2017 and March 31, 2018, during the year ended March 31,2014, the Company decided to prepay a term loan taken from a bank in earlier years under a consortium arrangement, secured by assets of the Company and pledge of shares of the Company held by the USL Benefit Trust (of which the Company is the sole beneficiary). The Company deposited a sum of INR 6,280 million, including prepayment penalty of INR 40 million, with the bank and instructed the bank to debit the amount from its cash credit account towards settlement of the loan and release the assets and shares pledged by the Company. The bank, however, disputed the prepayment. The Company has disputed the stand taken by the bank and its writ petition filed on November 6,2013 is pending before the Hon'ble High Court of Karnataka. In August 2015, the bank obtained an ex parte injunction in proceedings between the bank and Kingfisher Airlines Limited (KFA), before the Debt Recovery Tribunal, Bangalore (,DRr), restraining the USL Benefit Trust from disposing of the pledged shares until further orders. The Company and USL Benefit Trust, upon receiving notice of the said order, filed their objections against such ex parte order passed in proceedings in which neither the Company nor the USL Benefit Trust were enjoined as parties. In February 2016, the Company received a notice from the bank seeking to recall the loan and demanding a sum of INR 459 million. Pursuant to an application filed by the Company before the Hon'ble High Court of Karnataka, in the writ proceedings, the Hon'ble High Court of Karnataka directed that if the Company deposited the sum of INR 459 million with the bank, the bank should hold the same in a suspense account and should not deal with any of the secured assets including shares pledged with the bank till disposal of the original writ petition filed by the Company before the Hon'ble High Court of Karnataka. During the quarter ended June 30, 2016, the Company deposited the said sum and replied to the bank's various notices in light of the above. The aforesaid amount has been accounted as other non-current financial asset. On January 19, 2017, the DRT dismissed the application filed by the bank seeking the attachment of USL Benefit Trust shares. During the quarter ended September 30, 2017, the bank filed an ex-parte appeal before the Debt Recovery Appellate Tribunal ('0 RAT'), Chennai against the order of the DRT. During the quarter ended December 31, 2017, the Company has been impleaded in the proceedings subsequent to the DRAT's order. The appeal is pending for final hearing. With regard to the writ petition filed before the Hon'ble High Court of Karnataka, an early hearing application was allowed and the hearing of the main matter has commenced during the quarter ended December 31, 2018.
9. Receivable from Bihar government
As disclosed in the financial statements for the years ended March 31, 2016, March 31, 2017 and March 31, 2018, the Government of Bihar in exercise of the powers conferred under Section 19(4) of the Bihar Excise Act, 1915 through its notification dated April 5, 2016 imposed a ban on trade and consumption of Indian Made Foreign Liquor and foreign liquor in the state of Bihar.
The notification was challenged in the Hon'ble High Court of Patna which set aside the notification by an order dated September 30,2016, and held Section 19(4) of the Bihar Excise Act, 1915, as amended by Bihar Excise (Amendment) Act, 2016, as ultra vires the Constitution of India. Subsequently, the Government of Bihar re-imposed prohibition by notifying a new legislation i.e., The Bihar Prohibition and Excise Act, 2016, on October 2,2016. The Government of Bihar also preferred a special leave petition ("SLP") before the Hon'ble Supreme Court against the judgement of the Hon'ble High Court of Patna pursuant to which the Hon'ble Supreme Court has stayed the order of the Hon'ble High Court of Patna. The Company had sought refund of VAT of INR 288 million and Excise duty of INR 265 million aggregating to INR 553 million (including VAT of INR 179 million and Excise duty of INR 175 million paid by the Company's tie-up manufacturers) from the Government of Bihar under the applicable law at that time, in respect of billed stocks returned by Bihar State Beverages Corporation Limited (UBSBCLU)or stocks destroyed pursuant to the notifications.
The Company had received a letter dated August 16, 2017 from the Government of Bihar, stating that it is not liable to refund the aforesaid VAT and Excise duty under the Bihar Prohibition and Excise Act, 2016. Thereafter, on October 17, 2017, the Company filed a writ petition before the Hon'ble High Court of Patna seeking refund of the aforesaid VAT and Excise duty, paid by the Company to the Government of Bihar.
During the quarter ended September 30,2018, consequent to the order of the Hon'ble High Court of Patna in response to the above mentioned writ petition, the Company has received a refund of VAT of INR 73 million and Excise duty of INR 0.04 million from Government of Bihar. The Company is taking appropriate steps to pursue the remaining amounts of VAT as well as the Excise duty refunds. The matter was heard on December 18, 2018 wherein the Hon'ble High Court of Patna reserved the matter for final orders. The Company has provided for these amounts as a matter of prudence in view of uncertainty around the amount of time it may take to recover the said amounts.
During the quarter ended March 31, 2018, the Company had received a demand from BSBCL seeking demurrage charges for the stock that was lying in their warehouses post the imposition of prohibition till the same was shifted out of the state pursuant to the orders of the Supreme Court. The Company has refuted the claim and has filed a detailed response. During the quarter ended December 31, 2018, there is no further development on this matter.
10. Details of Exceptional items- loss, net [Refer Note 4(c)]For Table, kindly refer Corporate Announcements on www.bseindia.com.
11. During the quarter, the Company has come across potential differences in process losses and potential resultant differences in the inventory of a few categories of work in progress in certain plants. The Company is in the process of undertaking a review in affected plants, with the help of an independent expert as required, in order to ascertain the actual quantum of differences, if any. Should the findings establish any differences, the Company will take appropriate steps to understand the causes and address the same. At this stage, the Company is unable to determine the related financial impact, if any, arising from such potential differences. Accordingly, the results for the quarter and the nine months ended December 31, 2018 do not include any adjustment in respect of the above.
12. The Statement of Standalone Unaudited Financial Results for the quarter and nine months ended December 31, 2018 has been reviewed by the Audit and Risk Management Committee of the Board of Directors and approved by the Board of Directors at their meetings held on January 23,2019. The statutory auditors of the Company have carried out a limited review of this Statement of Standalone Unaudited Financial Results for the quarter ended December 31, 2018.