Cancels power of attorney to IDBI Trusteeship on pledged shares; bankers contend this isn’t legally possible.
Vijay Mallya’s UB Group has escalated its battle with Indian public sector banks by cancelling the power of attorney (PoA) given in favour of IDBI Trusteeship Services on United Spirits’ pledged shares.
This means anyone buying UB Group’s pledged shares of United Spirits (USL) will be facing legal action from the former. A power of attorney is issued to the trusteeship, a neutral party, to safeguard the interest of lenders in case of a default by a borrower.
Two UB Group companies, Kingfisher Finvest and UBHL, have also cancelled the PoA for 5,91,50,000 shares worth about Rs 32 crore of the now defunct Kingfisher Airlines (KAL). The PoA was given in 2008 and UBHL and Kingfisher Fininvest cancelled the PoA on Tuesday. Any transaction in these shares will be considered null and void, UBHL and Kingfisher Finvest India warned in a notice today. USL closed three per cent down at Rs 2,411 a share, while KFA shares closed the day two per cent lower, at Rs 5.3 a share. The UB Group had pledged these shares with the banks to avail of Rs 7,000 crore of loans, on which it later defaulted as its airline collapsed.
An email to the UB Group did not elicit any response till going to press.
When asked, a senior IDBI Bank official said the PoA which goes along with pledged shares was irrevocable. "The PoA can’t be cancelled unilaterally at the instance of the party that pledged a financial instrument as security for loans and advances. Normally, the reversal (cancellation) only happens on repayment of loans. This looks to be a weak defence in this case," the official said.
This comes as bad news for the banks which were planning to sell USL shares to salvage part of their loans to KAL. United Bank of India, which has Rs 400 crore (Rs 4 billion) exposure in the airline, has already filed a winding-up petition in the Karnataka high court against the UB Group after the company defaulted on the loans.
Any legal tangle will dissuade investors from buying USL shares and vitiate the relations between bankers and the UB group. The banks have not only sunk a lot of money as debt but lost a lot by investing in the falling
share prices of Kingfisher. The consortium of 17 banks had an exposure of about Rs 7,000 crore (Rs 70 billion) to the airline, which remains grounded since last year. Of this, State Bank of India’s exposure is the highest at Rs 1,600 crore (Rs 16 billion), followed by Punjab National Bank and IDBI Bank at Rs 800 crore (Rs 8 billion) each. Bank of India and Bank of Baroda have an exposure of Rs 650 crore (Rs 6.5 billion) and Rs 550 crore (Rs 5.5 billion), respectively.
In the deal signed between Diageo Plc and the UB Group in November last year, the former acquired a 27.4 per cent stake in USL for Rs 1,440 a share, at a total of Rs 5,725 crore. USL’s share price has risen substantially since the $2 billion transaction was announced (see chart).
However, the subsequent open offer failed to get any shares for Diageo and these pledged shares are now crucial for Mallya to conclude the transaction.
Diageo will also get new shares amounting to a tenth of the post-issue enlarged share capital of USL. The completion of the transaction was subject to a number of conditions, including release of all security interests over the USL shares and receipt of mandatory regulatory approvals.
Even if Diageo’s stake is less than 50.1 per cent, the share purchase agreement still obliges UBHL to vote in favour of all USL resolutions proposed by Diageo for four years.
