Tuesday, 15 March 2016


The culture of ‘Self –enriching’, growing rich at the cost of others, is fast catching up in India, courtesy the politicians and the failure of systems to penalize them,thereby failing the ‘Doctrine of unjust enrichment’.

Mr Vijay Mallaya left the country, not set to return in the near future, similar to Mr. Lalit Modi and the notorious Dawood Ibrahmin.

The systematic failure of the Banks and the Regulatory system, in tandem with the blatant irresponsible use of the Kingfisher conglomerate funds as the promoters personal money bank all culminated into this massive blow up.

a) The total amount that KFA owes to all banks is approximately Rs. 9,000 Crores, broadly divided between the banks as,SBI Rs. 1,600/- Crores, IDBIRs. 800/-Crores,PNB Rs. 800 Crores,BOI Rs. 650 Crores,BOB Rs. 550 Crores.

b) Consortium of 17 lenders led by SBI had from time to time extended loans on favorable terms to KFA. Was Due diligence properly conducted? Was credit appraisal properly done? With individual risk of each bank being stretched by individual loans, a consortium loan would further weaken the banks security and stretch the company’s asset cover to its limits.

c) Every bank has a credit committee.Their role in sanctioning huge amounts? As mentioned before, the banks had individual credits extended to the company along with the consortium loan. This fact in itself should have raised red flags within the banking system as it goes well beyond the banks systematic risk.

d) Were they convinced to finance an aircraft which they had never done in their life? Nor having knowledge of financing aircrafts? A capital intensive industry in a competitive market built on cash flows and working capital is massive risk in itself which requires strenuous planning and sound crisis mitigation systems in place. 

e)In the year 2009-10,the consortium restructured their debt, even when KFA had negative net worth and was technically categorized as an NPA. As a stakeholder, the banks should have raised concerns and filed for creditors liquidation given the bad shape of the company’s debts. However, restructuring the same debt was bound to fail, and the banks had a moral duty to end the company then and there. Ignoring the moral duty, they converted the loan into equity, that too at a premium. Rs. 1,355 Crores of debt was converted into equity at 61.6% premium of market price. In lay man’s terms, a loan was converted into capital. Who benefited from this? Certainly not any of the stakeholders!

f) A common element in all of the lending’s was the reliance on the Kingfisher brand value and its (assumed) ability to generate cash. How far can one take the reliance on ‘brand value’? How reliable is the valuation itself. Given the bad shape of the debt in the company and the conglomerate as a whole, shouldn’t the brand be revalued from time to time to reflect its true value?

h) Inspite of all the aforementioned problems the company was facing, Vijay Mallya drew a salary of almost Rs. 34 Crores. Was there no shareholder activism or moral obligation on the any of the lenders and Financial Institutional Investors to oppose this practice?

i) The auditors, of the Banks as well as KFA, must have notices this bubble of loan bloating up for quite a while. In a situation which escalated to non-payable debt of Rs. 9,000 Crores, none of the auditors of any organizations which were a part of this transaction had qualified any of the audit reports. Isn’t this a breach of the auditor’s fiduciary duty?

Let us not forget that every company here had to file its compliances regularly to regulators from every spectrum of the economic industry. Which brings us to the next point.

The Enforcement Directorate, RBI, Directorate of Aviation, the quasi-judicial body of DRT, the Registrar of Companies, the Income tax authorities and ultimately the Stock Exchange and SEBI. All of these regulatory bodies had received some form of literature pertaining to KFA’s predicament, and yet, no suo moto action was taken. Some of the issues which these bodies should have picked can reiterated, such as:

-          Conversion of 20%loan in to equity when net worth was flattening.
-          Was prudential credit exposure limits followed by banks?
-          The borrower’s inadequate credit ratings and the Company’s eligibility. KFA’saviation license was cancelled in the year 2012 and had not flown since then. How such a company which fails the basic test of ‘going concern’ allowed to raise debt on a continuous basis.
-          The Labour commissioner did not take any action in spite of salaries not paid on time.

CBI issued Look out Circular(LOC)against Mallaya in October and changed it back in November. Why weren’t any reports raised to question this action which was obviously on the right track? SFIO tightened their grip on defaulting companies and the irresponsible lenders but only when it was too late. Stakeholders expect a more pro-active intimidation from regulatory authorities. Similarly, DRT has given adjournments a multitude of times, which can be viewed as a failure of the judicial system. Did all the aforementioned investigating agencies act with rectitude in the KFA case?

KFA was incorporated as a birthday present to the son of Vijay Mallya, Siddharth Mallya, on his 18th birthday, listing him as one of the Directors. At the inception, the airline functioned in able hands actively killing the competition by setting up benchmark of affordable luxury travel. However, it started going downhill soon after. It started being used as the Mallya’s personal charter airline, which primarily came into focus when he flew in pop star Enrique Iglesias for his 60th Birthday, and started directing personal attacks on other airline by tweeting about their poor service. Furthermore, the Basic principles of corporate governance were not followed while running the company, let alone ethical standards.

He is drawing salary as Rajya Sabha Member(tax payers money) and he ran away from India on Diplomat  passport.  

This is not a one –off story.Such stories get repeated with alarming regularity and yet every time the regulators swoop in when the worst has passed. Jindal Steel & Power,Jai Prakash Associates whose ratings have been downgraded by 2 notches in a single action, indicate that they need to be monitored more closely.

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