UBHL auditors raise concern over Kingfisher exposure, defaults

Auditors of UB group's holding firm, UBHL, have raised concerns over its significant exposure to debt-ridden Kingfisher Airlines, as also on delays and defaults related to tax dues and repayments to lenders.

UBHL (United Breweries Holdings Ltd) is the holding firm for Vijay Mallya-led UB group, whose companies include United Breweries Ltd (UBL), United Spirits Ltd, McDowell Holdings, Mangalore Chemicals and Fertilisers and UB Engineering, besides crisis-hit Kingfisher Airlines (KFA).

The observations have been made by the auditors in UBHL's latest annual report for the financial year 2011-12 that is being circulated among the shareholders ahead of the Annual General Meeting (AGM) on September 27 in Bangalore.

As per the Auditors' Report, UBHL has a "significant financial exposure to KFA in the form of investments in equity, loans and advances and guarantees.

"KFA has considerably scaled down its operations and it is under severe financial stress.

No provision has been made in the accounts for the probable loss that may arise due to non-recovery of loans and advances and other receivables, decline in the value of investments and invocation of guarantees."

UBHL, on its part, has said that the company along with its subsidiaries has significant financial exposure on various counts to KFA, which has ceased to be a subsidiary with effect from February, 18, 2012 and is now an associate company.

This exposure as on March 31, 2012 included equity investment of Rs 2,114.28 crore, loans and advances Rs 1,048.7 crore and other receivables Rs 209.08 crore, and corporate guarantees to banks/aircraft lessors Rs 8,925.86 crore.

"Certain corporate guarantees have been invoked and KFA is under negotiation in this regard with beneficiaries. The management is reasonably confident that none of the guarantees would eventually devolve upon the company," UBHL said.

"The ultimate impairment of investments and non-recovery of loans and advances are not presently quantifiable and hence no provision has been considered in the accounts," it added.

The company said that the Indian airline industry and KFA in particular is currently exposed to one of the toughest operating environments and is expected to struggle with profitability pressures.

The auditors of UBHL further observed that service tax dues amounting to Rs 2.42 crore and custom duty of Rs 7 lakh have been outstanding for more than six months.

UBHL is generally regular in depositing its statutory dues including those related to provident fund, investor education and protection fund, employees state insurance, income tax, sales tax, wealth tax and other material statutory dues, they added.

In another observation, the auditors said that UBHL has defaulted on repayments to financial institution and banks.

"The unpaid overdue installments and interest to banks and financial institutions as at March 31, 2012 were Rs 9.17 crore. The same has been paid in April 2012. The company has not issued any debentures," they added.

The auditors further said that an overall examination of the balance sheet of the company shows that an amount of Rs 258.04 (rpt) 258.04 crore raised on short-term basis have been used for granting long-term loans and advances.

In another observation about an amount of over Rs 52 crore being included as income for the year 2011-12 on account of guarantee/security commission charged to KFA, the auditors said the airline has not accrued the charge in view of the restrictions imposed by its lenders for the period commencing from April 1, 2011.

The total of such charge, accrued by UBHL for the period from 2011-12 stands at close to Rs 65 crore.

Guarantee commission represents the amount charged by UBHL for the corporate guarantees provided on behalf of subsidiaries and certain associate companies. The security commission represents the money charged for the securities pledged on behalf of a subsidiary and an associate company.

UBHL, on its part, said that the recovery of guarantee commission of Rs 52.1 crore could take longer than anticipated since KFA is presently precluded by its bankers' consortium to honour the obligation aggregating to nearly Rs 65 crore to the period up to March 31, 2012.

Earlier, auditors of debt-ridden Kingfisher Airlines have also said the air carrier needs to strengthen its internal audit systems and have raised concerns over numerous issues including delay or defaults in repayments to the lenders.

Kingfisher's net loss more than doubled to Rs 2,328 crore in 2011-12, from Rs 1,027 crore in the previous year.

Its total long-term borrowings stood at Rs 5,695 crore as on March 31, 2012, down from Rs 6,306 crore a year ago. Besides, it had short-term borrowings of Rs 2,335 crore at the end of 2011-12, up from Rs 604 crore as on March 31, 2011.

For these loans, the airline has used as security all its movable assets, trademarks, 'goodwill' of the company, credit card and other receivables and a mortgage on Kingfisher House.

The auditors have also said that an overall examination of KFA's balance sheet shows that funds raised on short-term basis to an aggregate extent of Rs 6,304.44 crore have been used for long term investment as on March 31, 2012.