Pernod Ricard violated the liquor policy of India's capital city by financially supporting retailers who in exchange stocked more of the French company's brands and boosted its market share, the country's financial crimes agency alleges.
India's Enforcement Directorate said in court documents filed in November that Pernod India provided corporate guarantees worth Rs. 2 billion (£20 million) in 2021 to its banker HSBC and then asked it to facilitate loans to retailers, who used the funds to bid for liquor store licences in New Delhi.
The Delhi government's policy prohibited manufacturers from participating in retail sales directly or indirectly and Pernod was "in contravention" as it effectively used bank guarantees to invest in retailers, said the documents, which were reviewed by Reuters.
The documents are not public and details of the allegations against Pernod have not been previously published.
Pernod Ricard India said it strongly denies the allegations of the directorate, adding that it "will continue to fully cooperate with the Indian authorities in this matter."
Benoy Babu, head for international brands for Pernod India, was arrested in November and remains in jail over the case. He faces allegations of money laundering under Indian laws and violating Delhi's liquor policy rules, but has denied wrongdoing. Babu, who has not been charged, is seeking bail, which a New Delhi court will hear on Jan. 19.
In his bail document, seen by Reuters, Babu says his arrest was "illegal" and he played no role in Pernod's decision to extend corporate guarantees. Babu could not be reached for comment and his lawyer didn't respond.
The court documents do not allege any wrongdoing by HSBC. The bank said in a statement to Reuters it could not comment on the matter which is "under investigation by the authorities."
The Enforcement Directorate and the Delhi city government did not respond to requests for comment.
The investigation adds to existing business and regulatory challenges for Pernod in India. The maker of Chivas Regal and Absolut vodka last year contested around £200m federal tax demand for allegedly undervaluing imports, saying it disagreed with the method used to calculate the tax due.
It has lobbied Prime Minister Narendra Modi's office for resolution of its many tax disputes, Reuters reported last year.
Pernod counts India as a key growth market where it has a 17 per cent share. While the market share for New Delhi alone was not available, industry sources say the capital is critical for any company as it is an affluent and urban tourist hub that serves as a showcase market.
In exchange for financial support by Pernod, New Delhi retailers who received the loans "had to ensure" that 35 per cent of the stocks in their shops would be Pernod products, the investigating agency said in its documents. It said its agents questioned HSBC and Pernod executives during the investigation.
As select retailers got loans with Pernod's support and stocked more of its products, the liquor giant's market share rose from 15 per cent to 35 per cent, the agency said.
The arrangement "establishes a clear intention of Pernod Ricard to indulge in brand pushing and (to) gain illegitimate market share," said one of the agency's documents, dated Nov. 26.
Pernod did not comment on these specific allegations.
Under the 2021 Delhi liquor policy, hundreds of store licences were awarded to private players as the city government exited the retail business in a move to liberalise trade and boost local government revenue.
Under the policy, liquor manufacturers were barred from applying for the retail licences to avoid formation of syndicates that could lead to over-charging and brand pushing.
Bids worth Rs. 90 billion (£900m) were received at the time. Delhi last year revoked the policy, and liquor is now only sold via government-run shops.
The allegations against Pernod and Babu are part of a broader probe by the Enforcement Directorate into alleged irregularities in the implementation of the policy by retailers, politicians and individual businesspeople.
One Enforcement Directorate document dated Nov. 10 says: "The main motive of Pernod Ricard in cartel creation was to ensure that the retail shops of the cartel partners purchased higher quantity of Pernod Ricard brands ... in lieu of the financial assistance provided."
The court documents show a senior HSBC banker told federal agents during questioning that the bank had received a board resolution from Pernod Ricard India for issuance of corporate guarantees to finance loans for retailers who planned to bid for the licences.
Reuters could not independently confirm that HSBC was given a board resolution from Pernod.
Babu told investigators a proposal related to issuance of corporate guarantees was shared internally with Pernod India's legal and finance teams and the company did the necessary due diligence, according to the documents.
The federal agency however said in the documents that due diligence was not completed by Pernod before the loans were given, and neither was any collateral taken by the company to safeguard its interests.
The documents did not say whether HSBC checked the guarantees and loan disbursals were in compliance with Delhi's liquor policy, or if it checked if Pernod had collateral for the guarantees. HSBC declined comment citing the ongoing investigation by authorities.
The chief financial officer of Pernod Ricard India, Richa Singh, told the agency during questioning that "ideally collateral should have been taken given the huge amount of corporate guarantee given," the documents show. Singh did not respond to a request for comment.
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