Mumbai: India’s capital market regulator is examining the deal struck between Diageo Plc. and Vijay Mallya under which the latter stepped down as non-executive chairman of United Spirits Ltd (USL) in return for a payout of $75 million.

The Securities and Exchange Board of India (Sebi) is looking into possible violations of corporate governance and insider trading norms in the settlement announced on Thursday, said two persons familiar with the regulator’s thinking. They spoke on condition of anonymity.

As part of the settlement, London-based Diageo also agreed to drop all charges of irregularities at USL under Mallya’s watch.

“Diageo Plc.’s agreement with Vijay Mallya for his resignation as chairman and non-executive director of USL is under examination. Sebi will seek details of the deal from USL," said one of the two persons cited above.

Sebi is examining the fine print of the deal and is also looking at trading patterns in United Spirits’ stock to determine whether insider trading norms had been breached.

Shares of USL had risen for five consecutive days till Thursday before the deal between the company and Mallya was announced late in the evening.

In these five session, the stock rose 17.5% while the benchmark BSE Sensex declined 2.8%. On Friday, after the announcement, shares of USL gained 2.45% to close at ₹ 2,729.85 apiece. The Sensex rose 0.8% to 23,154.30 points on Friday.

The settlement has raised questions from proxy advisory firms as well.

In a report on Friday, Stockholder Empowerment Services (SES) questioned whether USL could take the decision to drop charges against Mallya, noting that the matter had been referred in the past to Sebi, ministry of corporate affairs and stock exchanges.

“...now they are exonerating Mallya by becoming super regulator and deciding that there will be no personal liability," it said.

“What if there is any criminal liability?. Has Diageo estimated the same and disclosed to shareholders?" wrote JN Gupta, managing director of SES, in the report.

The second person quoted above said that USL’s decision to drop charges against Mallya will not have a bearing on the pending investigations against the company and Mallya.

“A financial deal between two companies would not have any bearing on the pending probe," said this person.

A Sebi spokesperson did not respond to an e-mail seeking comment. A USL spokesperson declined comment.

In April 2015, Sebi initiated a probe into suspected irregularities at USL following a complaint from Diageo. The probe was also looking into allegations of diversion of funds and lapses in disclosures between 2012 and 2014.

On 27 April 2015, the regulator wrote to USL seeking details of its accounts for 2013 and 2014. USL subsequently moved the Securities and Appellate Tribunal (SAT) to obtain a stay on the probe by Sebi; the appeal is still pending.

Diageo’s complaint to Sebi was based on a forensic probe by PricewaterhouseCoopers (PwC), which revealed that between 2010 and 2013, funds were diverted from USL and/or its subsidiaries to certain UB Group firms, including Kingfisher Airlines.

Sebi is currently examining all possible violations at USL including the role of Mallya.

Late on Thursday evening, Diageo, which controls USL, issued a statement that Mallya had decided to quit as chairman and non-executive director at USL after Diageo agreed to pay him $75 million (over ₹ 515 crore) and to absolve him of all liabilities with regard to alleged financial regularities in the past. Last year, Mallya had defied a call by the USL board to step down.

“The terms of exit suggest that Diageo and United Spirits Limited (USL) want a clean break from Vijay Mallya. While USL’s shareholders have been short-changed, the decision to untangle the company from the UB group is in their long term interest. Diageo is picking up the tab for this exit – but Diageo’s shareholders must hold its board accountable for its inability to break free from the Mallya stranglehold," another proxy advisory firm, Institutional Investor Advisory Services (IIAS), said in a report on Friday.

In a separate development, USL said it will continue to pursue a claim for the recovery of 1,337 crore of loans to former group company United Breweries Holdings Ltd (UBHL) even after Mallya’s departure.

USL chief executive Anand Kripalu said on Friday that the company retained the right to pursue the recovery of the loans even after the settlement with Mallya.

Mallya said on Thursday he intends to spend more time in England.

“Let’s be very very clear. Mr Mallya may move to London. This is UBHL which is a legal entity here in India and this is a loan agreement between USL and UBHL. UBHL is not going to London," Kripalu said on a conference call.

“Therefore quite clearly we are reserving the right to pursue, we’ve started pursuing and we’ll continue to pursue,... and this no way compromises our position on that."

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