Vijay Mallya’s spokesperson declined to comment Vijay Mallya’s spokesperson declined to comment

WANTED IN India for debt default and alleged financial irregularities as detailed in the recent Serious Frauds Office report, Vijay Mallya may have some more explaining to do. Paradise Papers investigated by The Indian Express show that after he sold his United Spirits Limited India (USL) to the Diageo group in 2013, Diageo approached a London-based law firm Linklaters LLP to undertake a massive restructuring exercise to simplify the complex group structure created by Mallya.

One reason for the complexity of the holding structure, records show, appears to have been aimed at a single objective — allegedly diverting funds through USL Holdings Ltd (BVI), an entity in a tax haven (British Virgin Islands); and three subsidiaries in the UK. These were USL Holdings (UK) Ltd; United Spirits (UK) Ltd and United Spirits (Great Britain) Limited (UK).

Documents from Appleby, which worked with Linklaters on the restructuring, show that funds amounting to over $1.5 billion were funnelled, as debt, into these four subsidiaries over a period of seven years till 2014.

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Two years after they took control of United Spirits, Diageo undertook a restructuring process to get rid of these three intermediate subsidiaries and so, effectively, ended up waiving the $1.5-billion debt owed by these subsidiary companies.

That’s not all. As part of the restructuring, records show, Diageo also absolved Watson Limited, an entity owned by Mallya in his personal capacity, of its dues to a USL group company to the tune of 4.4 million pounds (around $5.8 million) through an exercise called novation — substituting one party in a contract with another, or replacing one debt or obligation with another.

The $1.5-billion loan waiver and the novation seems to have resulted in Mallya taking away much more than the Rs 1,225 crore that Diageo reported to BSE – the amount actually works out to around Rs 10,000 crore going by Appleby documents.

While Diageo approached Linklaters LLP for the restructuring process, the law firm in turn approached Appleby and sought assistance in getting authorisations for the Mauritius-based Watson Ltd to complete the transaction.

EXPLAINED: Why the Paradise Papers matter

Appleby documents confirm Diageo’s intent: “the purpose of the Reorganisation is to settle the inter-company loan balances.”

This is also corroborated by a stock exchange disclosure made by USL after the Diageo takeover. Diageo’s internal probe conclusively found that funds had been diverted between October 2010 and July 2014. “These improper transactions identified in the additional inquiry involved, in most cases, the diversion of funds to overseas and Indian entities that appear to be affiliated or associated with USL’s former non-executive chairman Vijay Mallya,” USL said in a stock exchange notice in July 2016.

While USL maintained that the company Board has directed the management to pursue recovery from the relevant companies and individuals and undertake any action including legal and regulatory as deemed necessary, the company ultimately seems to have waived the loan.

Appleby documents show loan waivers linked to Mallya firms Appleby documents show loan waivers linked to Mallya firms

When asked by The Indian Express on why it had waived the loan, a Diageo spokesperson said that as per March 31, 2015, it had granted interest-free loans in foreign currency amounting to Rs 4,941 crore and Rs 4793 crore in 2014 to USL Holdings Limited (BVI), a subsidiary, for acquisition of long term strategic investments.

The spokesperson added that a majority of this loan formed part of the company’s net investment in the subsidiaries. “As the borrowing entity had no operating income/cash flows to repay, the settlement of these loans was neither planned nor likely to occur,” she said.

“Accordingly the company has made adequate provisions and appropriate disclosures in its Annual Report for FY 2015-16 and FY 2016-17. The loans were given during the period of FY 2007-08 till FY 2014-15.”

Click here for Full Coverage on Paradise Papers

Asked how much money was siphoned off by Mallya, the Diageo spokesperson said: “…Inquiry prima facie revealed instances of actual or potential fund diversions amounting to approximately Rs 913.5 crore as well as other potentially improper transactions involving USL and its Indian and overseas subsidiaries amounting to approximately Rs 311.8 crores that has been intimated to the Bombay Stock Exchange (on) July 09, 2016.”

On why the USL Group decided to “novate” payment obligation of Watson Ltd (GBP 4.4 million due to be paid to USL Holdings UK Ltd) even though Watson Ltd was not a USL Group company, Diageo cited a para from the 2016 Annual Report.

This talks of USL entering into a settlement agreement with Mallya pursuant to which he resigned from his position as a director and chairman of the Company and of the boards of its subsidiaries.

Pursuant to this settlement, USL undertook to Mallya that it shall not bring a civil claim for money, damages or specific performance against the counterparties in relation to matters arising out of the initial inquiry mentioned therein.

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