Following a stock market announcement last week that Diageo was delaying its planned buying of the 26% of United Spirits stock on the open market, which would take its stake to a controlling 53.4%, it has emerged that the Securities & Exchange Board of India (SEBI) and two other Indian authorities have withheld approval.
The complex deal, which dates from November, involved Diageo buying 19.3% of the company from United Spirits's parent, United Breweries, 8% through a share issue and then the final 26% through the open market.
The first two steps have taken place; the third was supposed to go ahead between January 7 and 18. According to reports in the Indian press, SEBI is objecting to two clauses in the contract that give Diageo the right to walk away from the third step if the regulator seeks to raise the pre-agreed price of 1440 rupees per share (about £16.30), and buy United Breweries' remaining 15% stake at the same price in future.
The stumbling blocks have arisen after a surge in United Spirits' share price since November from R1440 to above R1900, while a research note last week from Credit Suisse set a target price of R2400.
Press speculation at the time of the deal said that United Spirits' flamboyant billionaire owner, Vijay Mallya, did the deal under pressure to raise money by the end of November to save his Kingfisher Airlines from its creditors.
If SEBI insists on changes to the contract, it could yet mean that Diageo has to raise its offer to get approval from the authorities. Since peaking near £19 in early December, the London-based company's share price has fallen around 5% to below £18.
Last week, Diageo was briefing analysts that the deal would go through without any changes. The company will be aware, however, of other Western companies that have become involved in regulatory skirmishes in India, such as Cairn Energy, whose sale of its Indian business to Vedanta Resources endured long delays before it gained approval.
Chris Wickham of Oriel Securities said the fall in Diageo's share price came on the back of a surge in 2012 that saw it outstrip the FTSE 100's other consumer stocks. Whisky exports have been a bright spot in the UK economy thanks to strong demand among the new middle classes in countries including China and India.
Phil Carrol of Shore Capital said: "Diageo is seen as a defensive stock. It is one of the consumer staples at a time when the markets have been boosted by the US appearing to overcome the fiscal cliff."
Diageo sees the deal as a vital move to get full access to the Indian spirits market, which is dominated by United Spirits.
A spokeswoman for Diageo said: "We continue to co-operate with SEBI as we address their questions during this review period."