Vijay Mallya’s Long Summer, as DRT Freezes Funds from Diageo

Vijay Mallya cannot take the $75-million payout from Diageo, rules DRT.

In a major setback to Vijay Mallya, the Debt Recovery Tribunal (DRT) on Monday said that the UB Group promoter will not be allowed to withdraw the $75-million payout from Diageo.

What exactly does this ruling mean?

We spoke with Pallav Pradyumn Narang, Partner, Tax and Advisory, Arkay and Arkay Chartered Accountants who explained the DRT order, delivered on a case filed by State Bank of India – the largest lender in the 17-lenders consortium to Kingfisher.

What is DRT?

Debt recovery tribunals, also known as DRT, were constituted in the year 1993 to provide ammunition to banks and financial institutions to help recover their funds from borrowers who may not otherwise be very motivated to pay back such sums. To start the process of recovery, an aggrieved institution (banks, NBFC etc) can file an application, also called an original application (OA) before the DRT. The concerned DRTs will examine the application and after giving an opportunity to the defendant, pass an appropriate order on the case within the ambit of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and the Securitization and Reconstruction of Financial Assets and Enforcement Security Interest (SARFAESI) Act, 2002.

Why is Vijay Mallya’s case before the DRT?

You might have already heard of this airline called Kingfisher that Vijay Mallya floated in the year 2005. Before it came to a crashing halt in 2013, the airline managed to raise and burn through Rs 7800 crore in debt from various banks. Given that the airline is bust, the banks obviously want their money back. Bank balance sheets have come under increased stress in recent years due to mounting bad loans. It should therefore not come as a surprise that banks would be very keen on making recoveries wherever possible. Even through Mr Mallya may insist otherwise, the banks are of the opinion that Mr Mallya has the ability to repay the loans but is not interested in doing so. Being so aggrieved, they have approached the DRT to take appropriate action against Mr Mallya and help them recover their money.  

Why this order now?

Mr Mallya has recently cut a deal with Diageo where he has agreed to resign as the Chairman of United Spirits Limited. In return, Diageo has agreed to pay Mr Mallya USD 75 million as non-compete fee and has also agreed to free him from allegations of financial irregularities at USL. The consortium of banks had filed an Interlocutory Application (IA) to stop the flow of money under the deal between Mr Mallya and Diageo. This order of the DRT comes in response to the most recent IA filed in the case.  

What does the judgment say?

The judgment prevents Diageo and USL from making payments to Mr Mallya till the time the OA, being the main proceedings before the DRT, is not disposed. Mr Mallya therefore would not be able to receive the USD 75 million that was he was due to receive over a period of five years, till the DRT comes to a decision on the remainder of the sums that had been borrowed by Kingfisher. In light of the other cases against Mr Mallya, it would seem this is going to be a long summer for him.    

(The writer, Pallav Pradyumn Narang is a Partner, Tax and Advisory, at Arkay and Arkay Chartered Accountants.)