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Karnataka High Court dismisses United Spirits’ plea for release of IDBI-held shares

The Karnataka High Court has dismissed a plea by United SpiritsNSE -0.04 %, seeking release of its securities held by IDBI BankNSE -0.14 % as a pledge from United Breweries Holdings (UBHL) against the bank’s exposure to the defunct Kingfisher AirlinesNSE -11.11 % (KFA)

Finding “no merit” in USL’s petition, the High Court has held that the world’s second largest spirits company by volume has diluted its stake “in utter disregard to covenants and stipulations contained in the agreements” and “violated guarantee furnished by it in favour of the bank (IDBI)”.

“The dilution of the assets has brought down the net worth of the guarantor, namely UBHL,” the court observed.

Appearing for USL, senior lawyer P Chidambaram had contended that the bank was holding back its securities despite the company paying back its Rs 625-crore loan on the grounds that the loans taken by Kingfisher Airlines remain unpaid.

USL contended that there is no connection between Vijay Mallya or UBHL with USL, which is now owned by Diageo, and that Kingfisher Airlines is a separate listed entity.

However, N V Srinivasan, counsel for IDBI Bank, contended that shares of USL were pledged with the bank as part of corporate guarantee to loans obtained for the airline.

Srinivasan argued that IDBI had given a loan to Kingfisher Airlines on the grounds that Vijay Mallya was the chairman of UBHL, of which USL was a part. It was asserted that UBHL had given a corporate guarantee to the loan transactions of the now-defunct airline.

Adjudicating in favour of IDBI Bank, the High Court has held, “IDBI had refused to accept the money worth Rs 628 crore credited to the cash credit account to ensure that corporate guarantee and personal guarantee are not rendere as paper guarantees and it should not be a silent spectator to asset stripping resorted to by the petitioners (USL).”

It further observed, “A borrower, while submitting a proposal for a facility, also provides the net worth statement of itself and proposed guarantors and it is one of the major and critical factors for any financer to consider the viability of the proposal. After availing the loan, if the net worth of any guarantor is diluted, it will directly affect the structure of a loan portfolio and will distort the security structure and financial and security ratios of the project.

“It appears that an attempt was made to claim back the security under the guise of making prepayment and to allow a third party as acquirers of shares to enter the management of the company.”

IDBI had refused to release USL’s pledged 3,459,090 shares, imposing a condition that read: “Dr Vijay Mallya and United Breweries (Holdings) Limited (UBHL) depositing the sale proceeds in respect of shareholding of Dr Vijay Mallya and family stake/UBHL’s stake sale in United Spirits Limited to Diageo Plc (Diageo) in Escrow/TRA account as may be decided by IDBI Bank, in context of personal guarantee furnished by Dr Mallya and corporate guarantee furnished by UBHL to IDBI Bank in respect of exposure of Kingfisher Airlines”.

USL had petitioned the High Court calling the said condition arbitrary and irrational.

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