Brand In Flight

Brand In Flight

Vijay Mallya must rue the day he got into the airline business. He could also be congratulating himself for handing over the entire can of worms to the 17 lending banks.

It is the banks who lent vast sums against inadequate and chimerical collateral, including a brand valuation of Rs. 4,100 crores arrived at  fancifully by Grant Thornton.

It is the banks who allegedly listened to the prods and whispered persuasions of powerful politicians.

It is they who sanctioned more later, even as things became untenable in 2010. They restructured the loans, accepting Mallya’s sop of a personal guarantee, accompanied by a nod and wink both from the finance ministry and the RBI.

And it is they who did nothing to recover monies, even as Kingfisher Airlines went down for the count by 2012.

Mallya, in turn, lost control of his flagship liquor company, along with all his houses in the company books, his Formula One and IPL teams.

His personal honour is compromised in front of thousands of unpaid employees to the tune of about Rs. 1,000 crores, including undeposited TDS.  

He still owns shares, 4% in United Spirits Ltd. (USL) valued at about Rs. 2,400 crores, and 32% in United Breweries Limited (UBL), valued at around 6,700 crores.

Mallya may however be off the hook for all intents and purposes. Under present laws, the outstanding is business debt, incurred in good faith amidst hopes of revival, attributable to the risks and vagaries.  

So much so, that the investigating agencies are now searching for one or more criminal cases to pin on Mallya, money-laundering, cheque-bouncing, tax fraud, something!

Mallya inherited his father’s liquor business, being the only son, at just 28. Emerging from the obscurity of coming from his father’s second family, he quickly became addicted to an emperor-like flamboyance, fuelled by an insatiable appetite for highly-leveraged, debt-fuelled growth.

But Kingfisher Airlines, established 2005, never ever made any money. By early 2012, it was in deep trouble, its share price tumbling, so that its market value stood at just Rs. 960 crores. It gave up all its international flights, and cut back the domestic ones till it was operating just 22, and still bleeding money. 34 of its leased planes went back as the rental leases of over Rs. 1,000 crores were outstanding.

It owed Rs. 7,500 crores  in 2012, and the promoter holding in hand was at 35.86 per cent; but after minussing the shares Mallya had pledged, the remainder was just 3.55%.

The only one amongst the lending banks that flew the coop was ICICI, because it presciently sold Rs. 430 crores worth to Srei Venture Capital in mid 2012. Most of the others converted their debt into equity, but this rapidly became worthless. From a high of some Rs. 40 per share, the share stood at just Rs. 1.36  in June 2015. So are these banks, holding worthless equity they took on voluntarily, even in any legal position to ask?

Cut to March 2^nd, 2016, and the $75 million of the Diageo severance settlement, of which Mallya is said to have gone to England with $40 million. 

He does have other businesses abroad, and the possibility of starting new ones, plus several properties/assets: in the UK, France, the US, South Africa, Hong Kong etc..

So, what is the moral of this story? First, the PSU banks are easy targets for crony capital motivated by the political class, and the only solution is to privatise them.

Second, the borrower must be moneyed, and the lending must be against solid and sufficient collateral in every instance. Here, the borrower should have been USL or UBL, with its solid balance sheets and assets.

Third, handing out thousands of crores against esoterics like brand value for a new enterprise is ridiculous,  and possibly malafide.

Fourth, if the pending Bankruptcy Code becomes law soon, the creditors will be able to jump in and seize the enterprise and its assets in future, change the management, and try to revive matters before it is too late.

Fifth, until there are steady profits generated, there is no case for lending money to a new entity in the absence of matching promoter funds and solid collateral.  

Exceptions that prove the rule: Standard Chartered Bank recently had to write off $1.5 billion. This, for lending huge unsecured monies to Indian infrastructure companies.

Therefore, nothing is fool-proof, and even as the ultra-cautious RBI under Raghuram Rajan frowns on risky lending, it doesn’t want to dry up bank credit either.

For: The Quint

(752 words)

March 15^th, 2016

Gautam Mukherjee