By Sumeet Chatterjee
MUMBAI (Reuters) - The board of Indian spirits maker United Spirits Ltd (NS:UNSP), majority-owned by Britain's Diageo Plc (L:DGE), has begun a procedure to remove its chairman and former owner Vijay Mallya due to alleged financial irregularities in the company.
Mallya has denied the allegations and said in a statement to Reuters on Monday he would not resign as chairman.
The development is the latest to hit Diageo, which has faced a legal battle and a failed tender offer since it paid a high price in 2012 for United Spirits, hoping that India's increasingly wealthy consumers will spend more on alcohol.
The United Spirits board said it had "lost confidence" in Mallya -- "without making any determination as to fault or culpability" -- after an inquiry into the company's financial accounts in the past few years found irregularities.
If Mallya refuses to resign, the board will recommend that shareholders remove him, Anand Kripalu, who was named the company's CEO by Diageo last year, said in a letter to the stock exchanges on Saturday.
"The inquiry also suggests that the manner in which certain transactions were conducted, prima facie, indicates various improprieties and legal violations," he wrote.
Kripalu said the report, submitted to the United Spirits board after the auditor's inquiry, showed that between 2010 and 2013, funds were allegedly diverted from the company to some of Mallya's group firms, including Kingfisher (LONDON:KGF) Airlines (NS:KING).
Mallya said in his statement that the auditor's report was based on "half truths and twisted facts", adding Diageo had taken four months for its due diligence of United Spirits before taking control of the company.
"It is, therefore, surprising that such prior period matters have become the basis for actions today," Mallya said. "I do not intend to resign as a Director of USL and shall pursue the contractual obligations with Diageo PLC."
Diageo said on Monday it had certain contractual obligations to retain Mallya as chairman, subject to certain conditions. Under the takeover pact, Mallya will continue in the role for as long as his group firm United Breweries Holdings (NS:UBHL) owns at least 1.3 million United Spirits shares.
It currently owns more than 4 million shares of United Spirits, the latest stock exchange data show.
Diageo said on Monday it would consider its agreements with Mallya and United Breweries in view of the inquiry report and the materials provided to it.
Mallya, who styles himself as 'King of the Good Times,' sold most of his shares in United Spirits and gave management control to Diageo at a time when his Kingfisher Airlines had been grounded by debts, safety concerns and unpaid staff.
But he played down any link between the United Spirits sale and problems at his airline.