Section A:
• Qualification regarding significant financial exposure to subsidiaries
United Breweries (Holdings) Ltd: 31-3-2013
From Notes to Accounts
32 Investments:
a) The Company has pledged 2,24,51,587 shares of United Spirits Limited,1,49,61,610 shares of Mangalore Chemicals & Fertilizers Limited, 62,69,728 shares of UB Engineering Limited, 19,46,33,555 shares of Kingfisher Airlines Limited and 34,20,239 shares of McDowell Holdings Limited to secure the borrowings of the company along with the borrowings of subsidiary companies and an associate company.
b) Investment as on 31st March, 2013, includes 21,870,156 shares of Kingfisher Airlines Limited, 7,196 shares of McDowell Holdings Limited,1,00,00,000 shares of Mangalore Chemicals & Fertilizers Limited and 24,46,352 shares of United Spirits Limited held in custody of lenders after they have invoked the pledge of these shares.
c) 2,18,70,156 shares of Kingfisher Airlines Limited, 2,15,000 shares of McDowell Holdings Limited, 1,00,00,000 shares of Mangalore Chemicals & Fertilizers Limited, 24,46,155 shares of United Spirits Limited held by the Company and pledged with banks for credit facilities extended to Kingfisher Airlines Limited have been sold by them, subsequent to Balance Sheet date.
d) T he Company’s investment of Rs. 26.512 million with IDFC Mutual Fund is given as a lien to secure the borrowings of an associate company.
e) The investment in subsidiaries (including step down subsidiaries) have been considered as long term strategic investments and diminution in their market value/net worth, though significant is considered temporary and hence no provision is considered necessary.
36.The Company, over the years has advanced significant amounts to subsidiaries including overseas subsidiaries aggregating to Rs. 1,709.556 million (Per year Rs.1,627.300 million) which have not yet been repaid. Even though there is erosion in the net worth of these subsidiaries, the Management is of the view that all the amounts are ultimately recoverable, taking into consideration their business plans and growth strategies.
40. Events occurring after the date of the Balance sheet
a) Kingfisher Airlines Limited (KFA) lenders have sold the following investments belonging to the company:
i) 24,46,155 equity shares in United Spirits Limited
ii) 2,15,000 equity shares in McDowell Holdings Limited
iii) 1,00,00,000 equity shares in Mangalore Chemicals & Fertilizers Limited
iv) 2,18,70,156 equity shares in Kingfisher Airlines Limited
b) KFA lenders have invoked company’s Corporate Guarantee and demanded payment of dues, due from KFA amounting to Rs. 64,932.900 million
c) The Company and others have filed a suit in the Hon’ ble Bombay High Court against the Consortium of Lenders who have advanced loans to Kingfisher Airlines Ltd., inter alia seeking the following reliefs:
i) for a declaration that the corporate guarantee agreement and pledge agreement, both dated 21st December, 2010 and executed by the Company are void ab-initio and non-est;
ii) for a permanent order and injunction, restraining Consortium of Bankers, their servants, agents or assigns, or any other person claiming by, through or under them or any of them, from acting upon, in furtherance or in any manner giving effect to the impugned notices dated 16th March, 2013, or from taking any other or further steps to act upon or in furtherance of the Pledge Agreement dated 21st December, 2010 save and except in accordance with the procedure set out in Clause 8.1 of the MDRA, including issuing a notice thereunder.
iii) for a permanent order and injunction restraining Consortium of Bankers, their servants, agents or assigns, or any other person claiming by or through or under or any of them, from acting upon or in furtherance of the Corporate Guarantee dated 21st December, 2010 given by the company and Pledge Agreement dated 21st December, 2010.
iv) that an order and decree for damages of sum of Rs. 31,996.800 million as set out in the particulars of claim be awarded to the plaintiffs.
v) that the maximum limit under the Companys’ Corporate Guarantees be Rs.16,014.300 million for reasons set out in the Suit.
43. The Company along with its subsidiaries has significant financial exposure on various counts to Kingfisher Airlines Limited (KFA). Although KFA’s license has expired on 31st December, 2012, under Civil Aviation Regulations, KFA has period of 24 months to reinstate the same. As at 31st March, 2013, the financial exposure includes equity investment of Rs. 20,953.043 million, loans and advances Rs. 23,592.484 million and other receivables Rs. 3,104.505 million and corporate guarantees to banks/ aircraft lessors, some of which have been invoked. Such invocations are being contested in court. The Management is reasonably confident that none of the guarantees would eventually devolve upon the Company. The ultimate diminution of investments and non-recovery of loans and advances are not presently quantifiable and hence no provision has been considered in the accounts.
From Auditors’ Report
Basis for Qualified Opinion
a) The company has significant financial exposure to Kingfisher Airlines Limited (KFA). These exposures are in the form of investments in equity of Rs. 20,953.043 million, loans and advances of Rs. 23,592.484 million, other receivables of Rs. 3,104.505 million and corporate guarantee of Rs. 89,643.800 million. KFA’s licence to operate the airline business stands suspended (refer note 43 to financial statements). Its net worth is completely eroded. It is under severe financial stress and has defaulted in honouring its financial obligations on several counts. Having regard to the financial condition of KFA, the company has discontinued charging it interest, guarantee/ security commission and logo fee.
Consortium of Lenders of KFA led by State Bank-of India have recalled’ their loans. They have invoked the corporate guarantee of Rs. 64,932.900 million and demanded the company to honour its obligation under its guarantee agreements (refer note 40 to financial statements). Certain aircraft lessors of KFA have invoked the corporate guarantee given by the company and have also instituted-proceedings u/s. 433/434 of the Companies Act, 1956 before the Honourable High Court of Karnataka (refer note 42 to financial statements). Above factors have resulted in substantial erosion in carrying value of company’s investments in KFA and significantly impaired the recovery of loans and advances made to them. Similar losses may also arise on account of invocation of corporate guarantee given by the company. The management has not quantified and provided for erosion in the value of investments and the probable losses. Had the company made such provisions, the loss disclosed in the Statement of Profit and Loss would have been higher by such amount and the carrying amount of investments and loans and advances would have been lower by that amount
b) Company carries Investments in certain subsidiaries. The carrying value of such investments is Rs. 700.610 million. There are significant declines in the carrying value of these investments but the company has not quantified and provided for such declines. Had the company provided for such decline, the loss stated in the Statement of Profit and Loss would have been higher by such amount and the carrying value of those investments would have been lower by an equal amount (refer note 32(e) to financial statements).
a) Certain subsidiaries owe to the company Rs. 1,709.556 millions. Net worth of these companies are eroded, significantly impairing the recovery of such loans and advances. Company has not quantified and provided for the probable loss. Had the company provided for such loss, the loss stated in the Statement of Profit and Loss would have been higher by such amount and the loans and advances stated in the Balance Sheet would have been lower by that amount (refer note 36 to financial statements).
QUALIFIED OPINION
In our opinion and to the best of our information and according to the explanations given to us, except for the effects of the matter described in the “Basis for Qualified Opinion” paragraph, the financial statements give the information required by the Act in the manner so required and give a true and fair view in conformity with the accounting principles generally accepted in India:
….
EMPHASIS OF MATTER
Attention is invited to the following;
a) Note 40 (a) to financial statements dealing with sale of pledged investments by lenders of Kingfisher Airlines Limited.
(b) to financial statements dealing with invocation of corporate guarantee by lenders of Kingfisher Airlines Limited.
FROM DIRECTORS’ REPORT
With reference to observations in the Auditors Report regarding accrual of guarantee/security commission from an Associate Company (erstwhile subsidiary), inclusion of interest from Subsidiaries and Associates, non-provision for loans and advances to certain Subsidiaries and an Associate Company and for decline in value of investment in certain Subsidiaries and an Associate Company, the relevant notes to the accounts comprehensively explain the management’s views on such matters.
