United Spirits Ltd.
You can view the entire text of Notes to accounts of the company for the latest year
ISIN No INE854D01024 52Wk High (Rs.) 779 BV (Rs.) 33.29 FV (Rs.) 2.00
Bookclosure 07/09/2018 52Wk Low (Rs.) 438 EPS (Rs.) 8.72 P/E (X) 67.33
Mkt Cap. (Rs. Cr.) 42,675.49 P/BV (X) 17.64 Div Yield (%) 0.00 Mkt Lot 1
2018-03

Company overview

United Spirits Limited (“the Company” or “USL”) is a public company domiciled and headquartered in Bengaluru, Karnataka, India. It is incorporated under the Companies Act, 1956 and its shares are listed on the BSE Limited and National Stock Exchange of India Limited. The Company is engaged in the business of manufacture, purchase and sale of beverage alcohol (spirits and wines), including through tie-up manufacturing and through strategic franchising of some of its brands.

These financial statements are approved for issue by the Company’s Board of Directors on May 24, 2018.

1. Critical estimates and judgements

The preparation of financial statements requires the use of accounting estimates which, by definition, will seldom equal the actual result. This note provides an overview of the areas that involved a higher degree of judgement or complexity, and of items which are more likely to be materially adjusted due to estimates and assumptions turning out to be different than those originally assessed. Detailed information about each of these estimates and judgements is included in relevant notes together with information about the basis of calculation for each affected line item in the financial statements.

The areas involving critical estimates or judgements are:

- Estimation of defined benefit obligation - Note 38

- Estimation of provisions and contingent liabilities - Notes 18 and 49

- Impairment of investments in subsidiaries - Note 35

Estimates and judgements are continually evaluated. They are based on historical experience and other factors, including expectations of future events that may have a financial impact on the Company and that are believed to be reasonable under the circumstances.

2.1 property, plant and Equipment

Notes:

(a) Buildings include an amount of INR 357 (2017: INR 357) in respect of which title deeds are yet to be registered in the name of the Company.

(b) Cost of buildings includes the following payments made for the purpose of acquiring the right of occupation:

i) INR NIL (2017: INR 660) equity shares (unquoted) of INR 100/- each fully paid in Shree Madhu Industrial Estate Limited INR NIL (2017 : INR 0).

ii) INR NIL (2017: INR 199) 6 % Debentures (unquoted) of INR 1,000/- each fully paid in Shree Madhu Industrial Estate Limited INR NIL (2017: INR 0).

iii) Deposit with Shree Madhu Industrial Estate Limited INR NIL (2017 : INR 0)

iv) Fully paid shares INR 0 (2017 : INR 0 ) held in a Co-operative Housing Society.

(c) Disposals include write down of INR NIL (2017: INR 217) in the value of certain plant and equipment disclosed as exceptional items [Refer Note 28(b)]

(c) Represents impairment loss recognised on Buildings and Plant and Equipment in respect of certain manufacturing units disclosed as exceptional items [Refer Note 28(c)]

Property, plant and equipment pledged as security

Refer to note 33 for information on property, plant and equipment pledged as security by the company.

Notes:

(a) Investment as a sole beneficiary in USL benefit trust was made as per the terms of composite scheme of arrangement approved by the Honourable High Courts of Karnataka and Bombay, upon amalgamating various companies with the United Spirits Limited. The trust has been established for the exclusive benefit of the Company and holds 3,459,090 equity shares of INR 10/- face value of the Company [Refer Note 14(h)]. As per the terms of the aforesaid scheme of arrangement, Company has carried this investment at the aggregate of book value as per the books of the concerned transferor companies. Also refer Note 33 for assets pledged and Note 44.

(b) The Company has measured its investments in subsidiaries at cost in accordance with Ind AS 27. On adoption of Ind AS, Company has measured these investments at deemed cost using the net carrying value as per previous GAAP as at March 31, 2015.

* This includes stocks of maturing spirits held by a branch outside India (in custody of an overseas vendor) amounting to INR 3,506 (2017: INR 4,024).

As per terms of an agreement entered in earlier year with an overseas vendor, the Company had a contractual obligation to purchase certain minimum specified quantities of fresh fills. However, the Company was unable to meet the purchase commitment and consequently, the Company is required to compensate the overseas vendor for shortfall relating to the purchase commitment up to June 30, 2017 amounting to INR 244. Further, the Company has accrued dues towards storage, disgorgement, blending, handling and loading charges amounting to INR 281 under the aforesaid agreement. The Company has sought regulatory approval to discharge such liability which is awaited. The Company is carrying an aggregate amount of liability of INR 525 towards the above mentioned obligations, which are presented under Trade Payables. The overseas vendor has written various letters to the Company, intimating that it has exercised its lien over the Company’s stock held at their warehouses corresponding to the amounts owed by the Company. The Company has contested the said claim, and called upon the overseas vendor to recall the said letter.

Amounts recognised in the Statement of profit and loss

Allowance for obsolete inventories for the year amounted to INR 73 (2017: INR 301). The net amount is recognised as an expense during the year and is included in Cost of materials consumed in Statement of profit and loss. Further a write down in the value of inventory of INR 36 (2017: INR 168) has been recognised as an expense as exceptional item.

For details of Inventories pledged as security Refer Note 33.

Notes:

(a) Includes INR 9 (2017: INR 11) transferred to a separate non-interest bearing escrow account pertaining to unclaimed public deposits which had matured in earlier years wherein duly discharged deposit receipts were not received from deposit holders.

b) Represents Bank deposits under lien.

Description of the facts and circumstances which led to classification as held for sale

The Company has identified certain properties, vehicles etc. as non-core to its operations. These planned assets are readily available for sale and an active programme to locate the buyer and complete the sale has been initiated by the management.

(b) Rights, preferences and restrictions attached to equity shares

The Company has one class of equity shares having a face value of INR 10 per share. Each holder of the equity shares is entitled to one vote per share. The dividend proposed by the Board of Directors is subject to the approval of the shareholders in the ensuing Annual General Meeting, except in the case of interim dividend. In the event of liquidation, the equity shareholders are eligible to receive the remaining assets of the Company after distribution of all preferential amounts, if any in proportion to their holdings.

(d) The Company has not issued any shares for consideration other than cash during the period of five years immediately preceding the reporting date.

(e) Details of shareholders holding more than 5% shares in the Company.

(f) There are no shares reserved for issue under options and contracts / commitments for the sale of shares / disinvestments.

(g) There are no bonus shares issued, bought back during the period of five years immediately preceding the reporting date.

(i) The Board of the Company at their meeting held on April 13, 2018 has considered and approved the following:

(A) Sub-division of 548,000,000 equity share of face value of INR 10/- per equity share into 2,740,000,000 of equity shares of face value of INR 2/- per equity share subject to approval by the shareholders of the Company by the way of special resolution.

(B) Sub-division of 1,200,000 7% non-cumulative redeemable preference shares of INR 100/- each into 12,000,000 number of preference shares of INR 10/- each and this class of preference shares shall merge with another existing class of 159,200,000 preference shares of the face value of INR 10/-each subject to approval by the shareholders of the Company by the way of special resolution.

(j) On December 20, 2013, the Honorable Karnataka High Court passed an order in the matter involving United Breweries (Holdings) Limited (UBHL) and its creditors and the Diageo Plc. setting aside an earlier leave order which permitted UBHL to sell 10,141,437 equity shares in the Company to Relay B V, pending disposal of the winding up petitions against UBHL. On the above matter, UBHL and Diageo plc. have approached the Honorable Supreme Court by way of special leave petitions (SLPs) challenging the order of the division bench. Pending, disposal of the above SLPs, the Honorable Supreme Court has directed that status quo be maintained in respect of the above mentioned transaction of sale of shares to Relay B V. Such shares are included in arriving at Relay BV’s shareholding in the Company.

Nature and purpose of reserves:

a) Capital reserve: Created pursuant to a Scheme of Amalgamation between the Company and SW Finance Co. Limited, sanctioned by the Honourable High Court of Karnataka and Honourable High Court of Bombay under the orders dated June 12, 2015 and August 28, 2015, respectively.

b) Capital redemption reserve: Capital Redemption Reserve is created for an amount equivalent to the nominal value of shares redeemed in earlier years in the Company (including the erstwhile Companies that were merged with the Company through several schemes of amalgamations / mergers).

c) Securities premium account: Securities premium reserve is credited when shares are issued at premium. The reserve is utilised in accordance with the provisions of the Act.

d) Central subsidy: The balance is taken over on amalgamation of Shaw Wallace Distilleries Limited with the Company during the year ended March 31, 2006 as per the terms of the arrangement approved by the Honorable High Courts of Karnataka and Bombay.

e) Share based incentive reserve: The share-based incentive reserve is used to recognise the grant date fair value of equity settled share-based payments and credited to this reserve as part of other equity over vesting period. Once the cost towards the plan is recharged by Diageo Plc, the same is reduced from other equity.

f) Contingency reserve: The balance is taken over on amalgamation of McDowell Spirits Limited with the Company during the year ended March 31, 2001 as per the terms of the arrangement approved by the Honorable High Court of Karnataka.

g) General reserve: The General reserve is created by way of transfer of profits from retained earnings for appropriation purposes. This reserve is utilised in accordance with the provisions of the Act.

h) Retained earnings: Retained earnings are the profits that the Company has earned till date, less any transfers to general reserve, dividends or other distributions paid to shareholders.

Provision is made for probable cash outflow arising out of pending indirect tax disputes / litigations with various regulatory authorities. It is not practicable for the Company to estimate the timing of the cash outflows, if any, in respect of the above, pending resolution of respective proceedings.

(b) Based on past experience, the Company does not expect all employees to avail the full amount of accrued leave or require payment for such leave within the next 12 months. However upon separation of an employee, the Company would be required to settle full amount of accrued leave due to be paid to an employee.

The Company’s risk management is carried out by treasury department under policies approved by the Board. Central treasury identifies, evaluates and hedges financial risks in close co-operation with the Company’s other functions. The Board provides written principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, interest rate risk and credit risk, use of derivative financial instruments and non-derivative financial instruments, and investment of excess liquidity.

(A) Credit risk

Credit risk management Trade receivables:

Company’s Credit Policy provides guidance to keep the risk of selling on credit within an acceptable level. The policy provides guidelines for risk assessment, review of credit limits and monitoring overdue trade receivables. The Company’s management monitors and reviews credit limits, overdue trade receivables, provisioning and write-off of credit impaired receivables.

Trade receivables are typically unsecured and are derived from revenue earned from two main classes of trade receivables, receivable from sales to government corporations and receivables from sales to private third parties.

Net receivables from government corporation customers amounted to INR 18,646 and 69% (2017: INR 18,985 and 64%) and private customers amounted to INR 8,352 and 31% (2017: INR 10,620 and 36%) of total trade receivables, respectively, on the reporting date.

The Company uses a provision matrix which is applied to overdue receivables other than receivables from government corporations (where the counterparty risk is assessed to be insignificant). The Company’s credit risk is concentrated mostly to states where goods are sold to private third parties.

Other financial assets:

Company carries other financial assets such as balances with banks, receivable from Tie-up manufacturing units, loans to other entities including subsidiaries and interest accrued on such loans etc.

Company monitors the credit exposure on these financial assets on a case-to-case basis. Loans to subsidiaries are assessed for credit risk based on the underlying valuation of the entity and their ability to repay within the contractual repayment terms. Company creates loss allowance wherever there is an indication that credit risk has increased significantly.

Significant estimates and judgements in Impairment of financial assets

The impairment provisions for financial assets disclosed above are based on assumptions about risk of default and expected loss rates. The Company uses judgement in making these assumptions and selecting the inputs to the impairment calculation, based on the Company’s past history, existing market conditions as well as forward looking estimates at the end of each reporting period.

(B) Liquidity Risk

Changes in regulations, guidelines and operating models influences liquidity risk. A prudent liquidity risk management is to ensure maintaining the required cash and / or have access to funds required through committed banking lines from banks or markets to address such risks, when they arise.

(i) Company has developed three year ‘Capital structure and funding strategy’ with an objective to gauge potential risk, project and strategically address funding needs, among others and ensure continued operations within acceptable tolerance limits.

(ii) Treasury team monitors rolling forecasts of the company’s liquidity position on a periodic basis. Funds are optimally used through centralised cash management system across the company and deficit if any are availed from the undrawn committed borrowing facilities (as below). Internal stake holders are aligned to provide ‘early warning’ surprises should they occur, so as to enable treasury team to pro-actively align the appropriate source and cost of borrowing to mitigate funding and interest risk.

(iii) Management has planned monetisation of certain non-core assets to infuse liquidity and reduce debts, thereby freeing up the banking lines to access in future, if required.

Financing arrangements

The Company had access to the following undrawn borrowing facilities at end of the reporting period:

The above facilities may be drawn at any time and repayable on demand. The Company has fully utilized fixed rate borrowing facilities as at the end of each of the reporting periods.

Maturities of financial liabilities

The tables below analyse the Company’s financial liabilities into relevant maturity groupings based on their contractual maturities for all non-derivative financial liabilities. The amounts disclosed in the table are the contractual undiscounted cash flows.

(C) Interest rate risk

Company’s main interest rate risk arises from Short-Term borrowings with floating rates, which may have impact on company cash flow.

Presently interest rates are bottomed out and the Company expects this to be stable with upward bias in the near term. In view of this the Company has kept long term borrowings at fixed interest rate. This does away with the exposure and insulates the Company from adverse movements. During the year, Company has issued unsecured Non-Convertible Debentures (‘NCDs’) amounting to INR 7,500 at 7.45% p.a. for a period of 3 years.

Majority of the Company’s short term borrowings are benchmarked to Bank’s MCLR (Marginal Cost of Lending Rates) and Money Market Rates.

(D) Foreign exchange risk

The Company is exposed to foreign exchange risk arising from foreign currency transactions, primarily with respect to the USD and GBP. Foreign Exchange risk arises from future commercial transactions and assets and liabilities denominated in a currency that is not the Company’s functional currency (INR). The risk is measured through a forecast of highly probable foreign currency cash flows.

3. Financial risk management

Foreign currency risk management

The Company’s risk management policy is to assess the Company’s net exposures which is mainly represented by receivable and payable towards exports and imports respectively, and partly represented by the loans extended in foreign currencies.

The Company can hedge its net exposures with a view on forex outlook. Since the net exposure is currently not material, this has not been hedged.

Foreign currency risk exposure:

The Company’s exposure to foreign currency risk at the end of the reporting period expressed in INR is as follows:

Impact on Profit after Tax

The sensitivity of profit or loss due to changes in exchange rates arises mainly from foreign currency denominated net exposures. The impact of sensitivity to fluctuations in foreign exchange rate is not considered material.

4. Capital management

Risk management

The Company’s objectives when managing capital is to:

a) have a balanced financial profile from short term (1 year) to mid-term (3 years) for sustainable leverage, providing;

- Headroom for future growth / expansion

- Financial flexibility in case of adverse business cycles

b) ensure the capital structure is at competitive advantage when compared to peers and other sector players through optimum debt mix through:

- Diversification of funding sources to manage liquidity and rollover risk

- Financial flexibility in case of adverse business cycles

5. Assets pledged as security

In respect of secured loans from bank and others (‘lenders’) obtained during earlier years and repaid during the year ended March 31, 2018 and in earlier years, the Company has in most cases obtained no objection letters from lenders for the release of the hypothecation / mortgage and have filed the necessary e-forms online with Ministry of Corporate Affairs (‘MCA1) to reflect the release of such charge in MCA’s records. In the few remaining cases, the company is in the process of securing no objection letters from the lenders. As there are no secured loans outstanding as at March 31, 2018, no assets have been shown as hypothecated / mortgaged as at March 31 2018.

6. Share based payments

Diageo Performance Incentive (DPI)

DPI is a one-time long-term incentive scheme for select employees who were active on Company’s payroll on September 1, 2016. A single grant was made in September 2016 with zero pay out for any leaver prior to vesting in September 2019 (vesting period - 3 years). Diageo Plc.’s share options (one option equivalent to one share) were granted to such employees as a percentage of salary. Vesting is subject to conditions such as continuity of employment, Diageo’s productivity and net sales growth and individual’s net promoter score. As at March 31, 2018 such outstanding share options are 59,994 (March 31, 2017: 97,904) and the charge for the year included in employee benefits expense is INR 20 (March 31, 2017: INR 40) (Refer Note 25) with a corresponding credit to other equity.

Share Appreciation Rights (SAR)

The India SAR Plan creates an opportunity to link the employee reward to Company’s share price performance. Under this plan, Company grants stock appreciation rights (based on USL share price) to select employees. The grant is made in September every year, as a percentage of salary. Cash pay-out equivalent to the value of shares will be made at the end of three years from the date of grant (the vesting period).

7. Share based payments

As at March 31, 2018 such outstanding SARs are 84,908 (March 31, 2017: 47,445) and the charge for the year included in employee benefits expense is INR 64 (March 31, 2017: INR 17) (Refer Note 25) with a corresponding credit to non- current provision for employee benefits (Refer Note 18).

8. Impairment of investments in subsidiaries

The Company performs at least an annual assessment for impairment of its investments in subsidiaries and recognises/ reverses impairment, as considered necessary in its investments.

The Company has determined recoverable values of its investments as fair value of net assets, less cost of disposal. Company has used the ‘cost approach’ valuation technique for determining fair value of its investment in subsidiaries using Level 3 inputs. An analysis of investments in subsidiaries where impairment charge/ reversal has been recognised, is provided below:

9. Related party disclosures

(a) Names of related parties and description of relationship (i) Parent entities

- Diageo Plc. (Ultimate Holding Company)

- Tanqueray Gordon & Company Ltd. (Intermediate Holding Company)

- Relay B V (Holding Company)

(iii) Fellow subsidiaries (with whom transactions have been taken place during the year)

- Diageo Scotland Limited

- Diageo India Private Limited

- Diageo Brands BV

- Diageo Great Britain Limited

- Diageo Australia Limited

- Diageo North America Inc.

- Diageo Singapore Pte Limited

- Diageo Singapore Supply Pte Limited

- Guinness Nigeria Plc

- Diageo Business Services India Private Limited

(iv) Other entity where there is control

- USL Benefit Trust, India

(v) Employees’ Benefit Plans:

- McDowell & Company Limited Staff Gratuity Fund

- McDowell & Company Limited Officers’ Gratuity Fund

- McDowell & Company Limited Employees Provident Fund

- Phipson & Company Limited Management Staff Gratuity Fund

- Phipson & Company Limited Gratuity Fund

- Carew & Company Limited Gratuity Fund

- United Spirits Superannuation Fund

- UB Group Employee Benefit Trust

Refer Note 38 for information on transactions with post-employment benefit plans mentioned above.

(vi) Key management personnel

Executive directors

- Anand Kripalu (Managing Director & Chief Executive Officer)

- Sanjeev Churiwala (Chief Financial Officer) (w.e.f April 1, 2017)

(vii) Non-executive/ Independent directors

- Mahendra Kumar Sharma

- Dr Indu Shahani

- D Sivanandhan

- John Thomas Kennedy (w.e.f August 17, 2016)

- Nicholas Bodo Blazquez (till January 21, 2017)

- Rajeev Gupta

- Randall Ingber (w.e.f February 2, 2017)

- Ravi Rajagopal (till October 13, 2016)

- Sudhakar Rao (till May 19, 2016)

- V K Viswanathan (w.e.f October 16, 2016)

- Vinod Rao (w.e.f May 24, 2016)

(e) General terms and conditions for transactions with related parties

Transactions with related parties are carried out in the normal course of business and are generally on normal commercial terms.

Loans to subsidiaries given in earlier years, are generally for an indefinite period or for a period of three years with an option to roll-over based on mutually agreed terms. Interest rates range from NIL to 10%. All loans to related parties are unsecured.

The Company has not recognised interest on loans to following subsidiaries as recoverability of interest is not reasonably certain.

10. Offsetting of financial assets and financial liabilities

(a) The Company provides working capital support to certain Tie-up manufacturing units (TMUs), who are responsible for manufacturing and distribution of certain products on behalf of the Company. The aforesaid working capital is represented by inventories, trade receivables, other financial assets and other financial liabilities. The Company has reported net working capital excluding inventory on the face of balance sheet as other financial assets /liability (net), as these amounts are expected to be settled on net basis. Details of such offset is given in the below table.

(b) The Company gives volume based rebates to certain customers. As a practice amounts payable by Company are offset against receivables from such customers and only the net amounts are settled. The relevant amounts have therefore been presented net in the balance sheet. Details of such offset is given in the below table.

11 (a) Defined contribution plans

The Company contributes to defined contribution plans for employee such as Provident Fund (PF), Employees’ Pension Scheme (EPS), Superannuation Fund (SF) and Employees’ State Insurance (ESI). PF and EPS cover substantially all regular employees while the SF covers certain executives and ESI covers eligible employees. Contribution to SF is made to United Spirits Superannuation Fund (‘USSF’). Other contributions are made to the Government funds or insurance companies. While both the employees and the Company pay predetermined contributions into the Provident Fund and the ESI Scheme, contributions into the pension fund and the superannuation fund are made only by the Company. The contributions are normally based on a certain percentage of the employee’s salary.

During the year, the Company has recognised the following amounts in the Statement of profit and loss, which are included in contribution to provident and other funds in the employee benefits expense.

*Excluding contribution to PF made to trusts which are in the nature of defined benefit plans managed by the Company.

(b) Defined benefit plans Gratuity:

The Company provides for gratuity, a defined benefit plan (the Gratuity Plan), to its employees. The Gratuity Plan provides a lump sum payment to vested employees, at retirement or termination of employment, of an amount based on the respective employee’s last drawn salary and years of employment with the Company. The Company has employees’ gratuity funds managed by the Company as well as by Insurance Companies.

Pension Plan:

The Company operates a defined benefit pension plan for certain executives and workers of the Company. This plan provides benefits to members in the form of a guaranteed level of pension payable for life. The level of benefits provided depends on their salary in the final year leading up to retirement.

Provident fund:

For certain executives and workers of the Company, contributions are made as per applicable Indian laws towards Provident Fund to certain Trusts set up and managed by the Company, where the Company’s obligation is to provide the agreed benefit to the employees and the actuarial risk and investment risk fall, in substance, on the Company. Having regard to the assets of the Fund and the return on the investments, shortfall if any, in the assured rate of interest notified by the Government, which the Company is obliged to make good is determined actuarially.

(c) Sensitivity analysis:

The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions, the same method (present value of the defined benefit obligation calculated with the projected unit credit method at the end of the reporting period) has been applied as and when calculating the defined benefit liability recognised in the balance sheet. The methods and types of assumptions used in preparing the sensitivity analysis did not change compared to the prior period.

(d) Risk exposure:

Through its defined benefit plans, Company is exposed to number of risks, the most significant of which are detailed below:

The Company actively monitors how the duration and the expected yield of the investments are matching the expected cash outflows arising from the employee benefit obligations. Investments are well diversified, such that the failure of any single investment would not have a material impact on the overall level of assets. A large portion of assets in March 2018 consists of government and public sector bonds, although the Company also invests in private sector bonds, special deposit schemes and bank balances. The plan asset mix is in compliance with the requirements of the respective local regulations.

(e) Effect of the defined benefit plan on the entity’s future cash flows

Expected contributions to post-employment benefit plans for the year ending March 31, 2019 is INR 167. The weighted average duration of the defined benefit obligation is 6.12 years (2017: 6.12 years). The expected maturity analysis of undiscounted provident fund and gratuity is as follows:

Note: The estimates of future increase in compensation levels, considered in the actuarial valuation, have been taken on account of inflation, seniority, promotion and other relevant factors such as supply and demand in the employment market.

12. Leases

(a) Finance lease:

The Company has acquired office equipment and vehicles on finance leases. The lease agreements for office equipment and vehicles are generally for a primary period of 36 to 60 months. The Company has an option to renew these leases for a secondary period. Lease arrangements for land is generally for a period of 95-99 years.

(b) Operating lease:

The Company’s significant operating leasing arrangements are in respect of premises (residential, office, manufacturing facilities, etc.) and plant and equipment, which are for a period generally ranging between 11 months and 3 years. These arrangements are usually renewable on mutually agreeable terms.

Contingent rent represents bottling fees paid to tie-up manufacturers under an arrangement which are in nature of operating lease, where rent is determined based on the output / volume.

13. Initial and Additional Inquiry

As disclosed in the financial statements for the year ended March 31, 2017, pursuant to the findings of the Board’s initial inquiry into past improper transactions (‘Initial Inquiry’), which was completed in April 2015, the Company executed settlement agreements with ten parties identified in the Initial Inquiry, and settlements with four parties were pending at the end of the previous financial year. During the quarter ended June 30, 2017, the Company reached settlements with two of the remaining parties. Discussions with one of the remaining parties turned adverse, and the matter remains likely to manifest itself into a dispute. The last remaining party identified in the Initial Inquiry has ceased to be in business and therefore it is not possible to reach any settlement with this party. All amounts relating to the said two parties that remain unsettled have been fully provided for. Therefore, there is no further material exposure to the Company.

As disclosed in the financial statements for the year ended March 31, 2017, upon completion of the Initial Inquiry which identified references to certain additional parties and certain additional matters, the MD & CEO, pursuant to the direction of the Board of Directors, had carried out an additional inquiry into past improper transactions (‘Additional Inquiry’) which was completed in July 2016 and which prima facie identified transactions indicating actual and potential diversion of funds from the Company and its Indian and overseas subsidiaries to, in most cases, Indian and overseas entities that appear to be affiliated or associated with the Company’s former non-executive chairman, Dr.Vijay Mallya, and other potentially improper transactions. All amounts identified in the Additional Inquiry have been provided for or expensed in the financial statements of the Company or its subsidiaries in prior years. Pursuant to a detailed review of each case of such fund diversion, and after obtaining expert legal advice, the Company has, where appropriate, filed civil suits for recovery of funds from certain parties, including, Dr. Vijay Mallya, before the appropriate courts. Further, at this stage, it is not possible for the management to estimate the financial impact on the Company, if any, arising out of potential non-compliance with applicable laws in relation to such fund diversions.

14. Loan to UBHL

As disclosed in the financial statements for the years ended March 31, 2015, March 31, 2016 and March 31, 2017, the Company had pre-existing loans/ deposits/ advances/accrued interest that were due to the Company and its wholly-owned subsidiaries from United Breweries (Holdings) Limited (‘UBHL1) and its subsidiaries aggregating INR 13,374 and that were consolidated into, and recorded as, an unsecured loan by way of an agreement entered into between the Company and UBHL on July 3, 2013 (‘Loan Agreement’). The Company has already made provision in prior financial years for the entire principal amount due, of INR 13,374, and for the accrued interest of INR 846 up to March 31, 2014. The Company has also not recognised interest income on said loan aggregating to INR 5,019 for the period from April 1, 2014 to March 31, 2018. The Company has offset payable to UBHL under the trademark agreement amounting to INR 307 for the year ended March 31, 2018 (cumulatively INR 846 up to March 31, 2018) against the aforesaid interest receivable from UBHL and consequently corresponding provision for interest receivable has been reversed to ‘Other Income’ in the relevant periods.

The Company sought redressalof disputes and claims through arbitration under the terms of the Loan Agreement. On April 08, 2018, i.e., subsequent to the end of the financial year ended March 31, 2018, the arbitral tribunal passed a final order against the Company. The reasons for this adverse award are disputed by the Company, and the Company is presently working with legal experts to challenge the said award. Notwithstanding the arbitration award, based on management assessment supported by an external legal opinion, the Company continues to offset payable to UBHL under the trademark agreement against the interest and loan receivable from UBHL.

15. Excess managerial remuneration pertaining to earlier year

The managerial remuneration for the financial year ended March 31, 2015 aggregating INR 63 and INR 153 to the Managing Director & Chief Executive Officer (‘MD & CEO’) and the former Executive Director and Chief Financial Officer (‘ED & CFO1), respectively, was approved by the shareholders at the annual general meeting of the Company held on September 30, 2014. The aforesaid remuneration includes amounts paid in excess of the limits prescribed under the provisions of Schedule V to the Companies Act, 2013 (‘Act1) by INR 51 to the MD & CEO and INR 134 to the former ED & CFO. Accordingly, the Company applied for the requisite approval from the Central Government for such excess remuneration. The Central Government, by letters dated April 28, 2016 did not approve the Company’s applications. On May 24, 2016 the Company resubmitted the applications, along with detailed explanations, to the Central Government to reconsider approving the waiver of excess remuneration paid. In light of the findings from the Additional Inquiry, the Company withdrew its application for approval of excess remuneration paid to the former ED & CFO by its letter dated July 12, 2016 and filed a civil suit to recover the sums from the former ED & CFO. The Company is awaiting response from the Central Government to its resubmitted application in respect of the MD & CEO.

16. Regulatory notices and communications

The Company had received letters and notices from various regulatory and other government authorities as follows:

a) as disclosed in the financial statements for the years ended March 31, 2016 and March 31, 2017, from the Securities Exchange Board of India (‘SEB0, in relation to the Initial Inquiry, Additional Inquiry, and matters arising out of the Agreement entered into by the Company with Dr.Vijay Mallya to which the Company has responded and no further communications have been received thereafter;

b) as disclosed in the financial statements for the years ended March 31, 2016 and March 31, 2017, from the Ministry of Corporate Affairs (‘MCA1) in relation to its inspection conducted under section 206(5) of the Companies Act, 2013 during the year ended March 31, 2016 and subsequent show cause notices alleging violation of certain provisions of the Companies Act, 1956 and Companies Act, 2013 to which the Company had responded. The Company has received a letter dated October 13, 2017 from the Registrar of Companies, Karnataka (the ‘Registrar1) inviting the Company’s attention to the compounding provisions of the Companies Act, 1956 and Companies Act, 2013 following the aforesaid show cause notices. The Company thereafter filed applications for compounding of offences with the Registrar in relation to three show cause notices, applications for adjudication with the Registrar in relation to two show cause notices and requested the Registrar to drop one show cause notice based on expert legal advice received. The management is of the view that the financial impact arising out of compounding/ adjudication of these matters will not be material;

c) as disclosed in the financial statements for the years ended March 31, 2016 and March 31, 2017, from the Directorate of Enforcement (‘ED’) in connection with agreements entered into with Dr.Vijay Mallya and investigations under the Foreign Exchange Management Act, 1999 and Prevention of Money Laundering Act, 2002 to which the Company hadresponded and no further communications have been received thereafter; and

d) as disclosed in the financial statements for the year ended March 31, 2017, from the Company’s authorised dealers in relation to certain queries from Reserve Bank of India (‘RBI’) with regard to: (i) remittances made in prior years by the Company to its overseas subsidiaries; (ii) past acquisition of the Whyte and Mackay group; (iii) clarifications on Annual Performance Reports (‘APR’) submitted for prior years; and (iv) compliances relating to the Company’s overseas Branch office, all of which the Company had responded to. During the financial year ended March 31, 2018, the Company has received further queries from authorised dealers in connection with items (i), (iii) and (iv) above to which the Company has responded.

17. Dispute with a bank

As disclosed in the financial statements for the years ended March 31, 2015, March 31, 2016 and March 31, 2017, during the year ended March 31, 2014, the Company decided to prepay a term loan taken from a bank in earlier years under a consortium arrangement, secured by assets of the Company and pledge of shares of the Company held by the USL Benefit Trust (of which the Company is the sole beneficiary). The Company deposited a sum of INR 6,280, including prepayment penalty of INR 40, with the bank and instructed the bank to debit the amount from its cash credit account towards settlement of the loan and release the assets and shares pledged by the Company. The bank, however, disputed the prepayment. The Company has disputed the stand taken by the bank and its writ petition is pending before the Hon’ble High Court of Karnataka. On completion of the loan tenure on March 31, 2015, the bank demanded an amount of INR 474 towards principal and interest on the said loan, which the Company contested in the Hon’ble High Court of Karnataka. In August 2015, the bank obtained an ex parte injunction in proceedings between the bank and KFA, before the Debt Recovery Tribunal, Bangalore (‘DRT’), restraining the USL Benefit Trust from disposing of the pledged shares until further orders. The Company and USL Benefit Trust, upon receiving notice of the said order, filed their objections against such ex parte order passed in proceedings in which neither the Company nor the USL Benefit Trust were enjoined as parties. In December 2015, the Hon’ble High Court of Karnataka issued a stay order restraining the bank from dealing with the above mentioned pledged shares until further orders. Thereafter in February 2016, the Company received a notice from the bank seeking to recall the loan and demanding a sum of INR 459, and the Company also received a subsequent notice in March 2016 issued under section 13(2) of SARFAESI Act in relation to the same loan. Pursuant to an application filed by the Company before the Hon’ble High Court of Karnataka, in the writ proceedings, the Hon’ble High Court of Karnataka directed that if the Company deposited the sum of INR 459 with the bank, the bank should hold the same in a suspense account and should not deal with any of the secured assets including shares pledged with the bank till disposal of the original writ petition filed by the Company before the Hon’ble High Court of Karnataka. During the quarter ended June 30, 2016, the Company accordingly deposited the said sum and replied to the bank’s various notices in light of the above. The aforesaid amount has been accounted as other non-current financial asset [Refer Note 5(a)]. On January 19, 2017, the DRT dismissed the application filed by the bank seeking the attachment of USL Benefit Trust shares. The Company on March 13, 2017 issued a legal notice to the bank asking them to provide the ‘no-objection’ for the release of the pledged shares, withdrawing the notices under SARFAESI and also to pay compensation on account of loss of interest, value of differential share price, loss of reinvestment opportunity, reputational damage etc. to which the bank has responded denying the claim. During the quarter ended June 30, 2017, the Company issued a rejoinder denying the incorrect averments of the bank and issued notice to each member of the board of directors of the bank informing them of the issue and the ‘mala-fide’ actions of the bank, to which the bank has responded denying the claim. The bank has, during the quarter ended September 30, 2017 filed an ex-parte appeal before the Debt Recovery Appellate Tribunal (‘DRAT’), Chennai against the order of the DRT. During the quarter ended December 31, 2017, the bank has subsequent to the order for the DRAT, filed an application impleading the Company in the proceedings.

18. Claim from a customer

Consequent to a voluntary disclosure made by the Company to a customer regarding prices historically charged by the Company to the customer being inconsistent with trading terms that apply between the Company and the customer, the Company received a claim during the quarter ended September 30, 2016 and thereafter a debit note for the period up to December 31, 2016, in the quarter ended March 31, 2017 and a revised debit note for the period up to April 30, 2017, in the quarter ended June 30, 2017. After considering an accrual of INR 250 which was made on this account in the financial year ended March 31, 2016, an additional liability had been recorded for the balance amount of INR 3,030 (including potential liability of INR 130 for the period January to March 2017) during the year ended March 31, 2017 of which INR 460 related to claims for sales made during the year ended March 31, 2017, which had been recorded as reduction from Revenue from Operations, and INR 2,570 pertaining to sales made in earlier years which had been disclosed as an exceptional item in the Statement of profit and loss for the year ended March 31, 2017. In respect of some of the specific products, the prices demanded by the customer resulted in the Company incurring a foreseeable loss and accordingly a provision for the onerous element in such contracts amounting to INR 75 had been made and included in exceptional items for the year ended March 31, 2017. The aggregate amount included in exceptional items was therefore INR 2,645 for the year ended March 31, 2017(Refer Note 28). For the quarter ended June 30, 2017, the estimated potential liability of INR 47 on account of price differences has been utilised from onerous provision and the remaining excess onerous provision no longer required, of INR 28, has been reversed as an exceptional item. During the quarter ended December 31, 2017, the Company utilized INR 3,200 out of the existing liability of INR 3,327 and offset receivables of equivalent amount from the customer. The customer and the Company have agreed on the revised price and trading terms for future supplies. (Refer Note 17).

19. Receivable from Bihar government

The Government of Bihar by its notification dated April 5, 2016 imposed a ban on trade and consumption of Indian Made Foreign Liquor and foreign liquor in the state of Bihar with immediate effect. Writ petitions were filed with the Hon’ble High Court of Patna challenging the said notification and seeking payment for supplies made by the Company and its Tie-up manufacturing units to Bihar State Beverages Corporation Limited (‘BSBCL’). By an order dated September 30, 2016, the Hon’ble High Court of Patna set aside the notification dated April 5, 2016 and held Section 19(4) of the Bihar Excise Act, 1915, as ultra vires the Constitution of India. Subsequently, the Government of Bihar re-imposed prohibition by notifying a new legislation i.e. The Bihar Prohibition and Excise Act, 2016, on October 02, 2016. The Government of Bihar also preferred a special leave petition (‘SLP’) before the Hon’ble Supreme Court against the judgment of the Hon’ble High Court of Patna pursuant to which the Hon’ble Supreme Court has stayed the order of the Hon’ble High Court of Patna. During the quarter ended December 31, 2016, the Company made an application seeking compensation from the Government of Bihar towards losses suffered as a result of arbitrary imposition of prohibition.

On January 24, 2017, the Government of Bihar issued a Notification prohibiting the manufacture of alcoholic beverages in the State (with effect from April 1, 2017) the consequences of which criminalise the continued storage of all stock of raw material and finished goods in the State of Bihar (including the stock lying at BSBCL). Pursuant to an application by the Confederation of Indian Alcoholic Beverage Companies (CIABC) in the Supreme Court, the Government of Bihar extended this timeline to April 30, 2017 and the Hon’ble Supreme Court further extended this to July 31, 2017, to allow additional time for companies to transfer said materials out of the State of Bihar.

The Company has since transferred substantial stocks of raw materials and finished goods outside the state of Bihar including the ‘billed stocks’ supplied by the Company pursuant to valid orders for sales which were in the possession of BSBCL and has destroyed such stocks which could not be transferred. In relation to certain raw materials lying in the State of Bihar, the Company during the quarter ended December 31, 2017 had received an approval from the Department of Liquor Prohibition, Bihar for sale of such raw material to entities outside the State of Bihar, before January 31, 2018, pursuant to which the said raw material has been shifted out of the State of Bihar during the quarter ended March 31, 2018.

The Company had sought from the Government of Bihar refund of statutory duties i.e. VAT and Excise duty paid in respect of the said stocks aggregating to INR 553 (including statutory duties paid by the Tie-up Manufacturing Units) which is considered good and receivable and is classified as other non- current assets (Refer Note 9). The Company had made a provision of INR 267 towards inventory reprocessing charges and write down in the value of inventory (Refer Note 10) for the year ended March 31, 2017. Further, a provision of INR 110 had been made towards employee retrenchment during the year ended March 31, 2017. The total provision in respect of the above items aggregating to INR 377 for the year ended March 31, 2017 had been disclosed as an exceptional item[Refer Note 28(a)]. During the current financial year, an additional provision of INR 180 has been made towards inventory reprocessing charges and write down in the value of inventory (Refer Note 10) and has been disclosed as an exceptional item. During the quarter ended September 30, 2017, the Company had received a letter from the Government of Bihar, stating that it is not liable to refund the aforesaid statutory duties under the Bihar Prohibition and Excise Act, 2016. Thereafter, on October 17, 2017, the Company filed a writ petition before the Hon’ble High Court of Patna seeking refund of the aforesaid statutory duties, i.e. VAT & Excise Duty paid by the Company to the Government of Bihar, which petition is presently pending adjudication.

During the quarter ended March 31, 2018, the Company received a demand from BSBCL seeking demurrage charges for the stock that was lying in their warehouses post the imposition of prohibition till the same was shifted out of the state pursuant to the orders of the Supreme Court. The Company has refuted the claim and has filed a detailed response.

20. Disposal of investment in United Spirits Nepal Private Limited

On January 15, 2016, the Company had entered into an agreement for sale of its entire holding of 67,716 equity shares in United Spirits Nepal Private Limited (‘USNPL’), constituting 82.46% of the paid up equity share capital of USNPL. The sale was subject to various regulatory approvals and other conditions precedent. During the current year, the Company has secured the approval of the Reserve Bank of India under the Foreign Exchange Management Act, 1999, in respect of the sale of shares in USNPL. Following the receipt of other relevant regulatory approvals and fulfilment of other conditions precedent, on February 28, 2018, the Company completed the sale of all the 67,716 equity shares held by it in USNPL at a price of Nepalese Rupees 5,042 per share, amounting to a total consideration of Nepalese Rupees 341,424,072 (INR 213).This resulted in a gain on disposal of investment in subsidiary of INR 148 which has been disclosed as an exceptional item [Refer Note 28(i)]. The sale consideration was remitted to India following the deduction of applicable taxes in Nepal. Following the completion of this sale, the Company holds no shares in USNPL, and USNPL has ceased to be a subsidiary of the Company. The Company will continue to have a licensing arrangement with USNPL pursuant to which, products bearing the Company’s brand names will continue to be manufactured, marketed and sold in Nepal.

The Company has given letters of support to the following subsidiaries to conduct their operations in such a manner as to enable them to meet their obligations, as and when they fall due for a period of twelve months from the balance sheet date:

i) United Spirits (Shanghai) Trading Co. Limited ii) Pioneer Distilleries Limited iii) Sovereign Distilleries Limited iv) Tern Distilleries Private Limited v) Four Seasons Wines Limited vi) Royal Challengers Sports Private Limited vii) Asian Opportunities & Investment Limited viii) United Spirits Singapore Pte Limited ix) Montrose International SA x) Palmer Investment Group Limited xi) UB Sports Management Overseas Ltd (Formerly known as “ JIHL Nominees Limited”) xii) USL Holdings Limited xiii) USL Holdings (UK) Limited xiv) United Spirits (UK) Limited xv) United Spirits (Great Britain) Limited xvi) Liquidity Inc.

Management is optimistic of a favourable outcome in the above appeals / disputes based on legal opinions / management assessment.

It is not practicable for the Company to estimate the timing of the cash outflows, if any, in respect of the above, pending resolution of respective proceedings.

21. Corporate Social Responsibility (CSR)

CSR amount required to spent as per Section 135 of the companies Act, 2013 read with schedule VII thereof by the company during the current year is INR 36(2017: NIL).

22. The Company does not have any derivative contracts as at March31, 2018. The Company has a process whereby periodically all long term contracts are assessed for material foreseeable losses. No provision for material foreseeable losses is considered necessary based on the review ofsuch contracts as at year end.

23. Previous year figures have been regrouped / reclassified to conform to the current year’s classification.