COLLECTIVE
FAILURE OF SYSTEM
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.
BANKS
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.
REGULATORY
AUTHORITIES
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
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.
No comments:
Post a Comment