No more 'Mallya's for 'Kingfisher's? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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No more 'Mallya's for 'Kingfisher's? 

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In this issue:
» Will Shanghai's free trade zone be a game changer?
» Washington's impending shut down
» RBI asks temples to declare gold holdings
» Indian farmers face 'emu bubble burst'
» ...and more!


00:00
 
"If you owe the bank Rs 100 that's your problem. If you owe the bank Rs 100 m, that's the bank's problem". This quote has been immortalized by scores of defaulting companies in India over the past two years. Only a few like Kingfisher Airlines grabbed media attention for holding India's top banks at ransom. Even the largest bank in India, State Bank of India (SBI), has been a victim of the wayward and financially sick aviation company's inability to repay debt.

After being in the aviation business for 7 years, the company amassed Rs 70 bn in debt. Vijay Mallya, the promoter of parent company United Breweries (Holdings), made no attempt to stem the steady decline in the company's fortunes. First the jet fuel suppliers stopped giving the airline fuel credit. The unpaid fees to airport operators and other agencies deprived it of licenses. And finally, pilots and cabin crew were forced to leave the cash strapped airline for non-payment of salaries. But instead of holding the promoter responsible, the aviation ministry was at one point considering bailing out the defunct airline. Lack of bankruptcy laws left little recourse for the bankers, who until recently could not even seize the airlines' immovable properties. The promoter meanwhile used the promise of stake sale and FDI in aviation to his advantage. What was most shocking was that the company's CEO took home a salary of Rs 39.9 m in FY13! (as per annual report). Thus the bankers waiting for repayment of crores of rupees in dues were left to look like jokers.

While the government is yet to bring the promoter of Kingfisher to book, at least it has learnt some lessons. The deluge of bad loans in the corporate debt restructuring (CDR) cell has left the government convinced that many are cases of willful default by promoters. Hence the Finance Ministry is setting up a new CDR committee. One that can allow banks to enforce management change in case of willful default. The committee will also scrutinize cases of debt restructuring. In such cases banks will have to outline steps to turn around the companies.

In a country where both availability and cost of capital are constraints for entrepreneurs, wastage of the same by undeserving people is nothing short of a crime. Most importantly, willful default by entrepreneurs can lead to a systemic problem in the banking sector. The PSU banks, in particular, have become a victim of this malaise. With investor confidence shaken, the government will have to ensure that the CDR cell does not indulge more 'Mallya's for 'Kingfisher's.

Do you think the possibility of change in management in financially sick companies will act as a deterrent for willful defaulters? Let us know your comments or post them on our Facebook page / Google+ page

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01:35  Chart of the day
 
The problem of banks having to write off NPAs has become so acute for India that even rating agencies have sounded alert. And it is not very difficult to figure out why. As per data from International Monetary Fund (IMF), Indian banks sport the least equity capital buffer amongst banks in Asia. This means that the Tier I (only equity) capital less net non performing assets is the least for banks in India. In the event of a deluge in NPA, the possibility of equity capital getting eroded is highest in the case of Indian banks. While the RBI is not yet calling NPAs a systemic risk for Indian banking, the problem is conspicuous in the case of few PSU banks.
Indian banks sport least capital buffer for writing off NPAs
Source: IMF

02:05
 
Do you know what's the best way to launch a big bang project? Especially one that has not been tried before and is a game changer of sorts? Well, the best approach in a situation like this would be to undertake a small pilot testing. In other words, the idea is to launch on a small scale first so that any glitches are taken care of before the final, large scale roll out. And it looks like China has taken this advice really to heart. As per CNN, the dragon nation has launched a new free trade zone in Shanghai over the weekend. Although no details are out yet, the new zone is expected to make it easier to do business in a small part of China. In other words, it is an attempt to move from an economic model that has so defined China over the past two decades. After years of explosive growth, the current growth model of mass manufacturing is in grave danger of burning itself out. And therefore the Government is making a desperate attempt to wean away from it and replace it with a more liberalised, free market approach. While the policymakers' heart is in the right place, its success or failure will play a significant role in shaping China's coming decades we believe.

03:07
 
You would think that political deadlock and playing the blame game is something that is prevalent in only India. But that appears to not be the case. Indeed, the US is facing a political crisis too as both the parties are not able to come to an agreement over the country's broader fiscal policy. And that is why there is the possibility of Washington facing a shut down from today. This means that due to the automatic spending cuts, many government agencies are expected to close down. And the non essential government staff will be forced to go on an unpaid leave. The spending cuts also seem to have impacted anti-poverty programmes and early childhood education among others. On top of that, the healthcare law 'Obamacare' has also been the subject of dispute between the parties. US has been plagued with the problems of recession, massive debt burden and unemployment for quite some time now. Relentless money printing by the US Fed has done almost nothing to jump start the economy. The only thing it has done is to take government debt to unsustainable levels. So spending cuts will have to be the norm if there is any hope of bringing the debt down. Anything else will only delay the issue further before it blows up on the US economy.

03:31
 
The Indian Government, saddled with twin deficits, has now turned to the Gods for help. It is perhaps with this intention that the Reserve Bank of India has sent notices to richest Indian temples to disclose their gold holdings. It is important to note here that gold is the second biggest imported item in the country after oil. Hence, high gold imports are a key culprit behind the record trade deficit. Now most of this gold is either hoarded or some part is donated to temples. As per the World Gold council report, the gold that lies with Indian temples is estimated at US$ 84 bn. Just to give you an idea, this is 56% higher than annual value of gold imports in FY13.

While the central bank is calling it a data collection exercise, the Hindu temples are in no mood to entertain. One may argue that the gold lying with the temples is unproductive and it will do the nation some good to bring it back into circulation. However, one must not forget that the Government has no right on this gold, unless the religious institutions volunteer. The mess that the economy is in these days is because of the rampant corruption and mismanagement of public funds by the Government. There is no guarantee that the temple gold will not be subject to the same kind of corruption and mismanagement. Instead of eyeing the temple's gold, the Government should perhaps put in efforts to bring back the black money that has been stashed abroad.

04:02
 
Another bubble burst. No this time it's not about asset classes such as real estate or gold or else. It's the farming business. The breeding of an Australian bird-Emu has met its end. Now, "Emu" is a large flightless bird resembling an ostrich and tasting like beef. Farmers across the world including India made some quick and high bucks with Emu farming. Emu raising for its meat, eggs and oil was a lucrative business opportunity some 5 years ago.

However, today the picture is grim. The herd mentality instinct led to mad rush of farmers in this business. Therefore, the feed costs tripled in a period of 3 years. And with the exploding emu population, the price of emu meat fell almost 25% in the same period. Buyers diminished. And farmers lost their money. Hence, killing the birds was the only option left to the farmers in order to reduce their losses. Not just that. The economics pertaining to this business also failed. Few entrepreneurs accepted deposits from the investors to capitalize on emu farming. Almost as high as 75% returns were promised. People were taken on a ride with tall assurances of investments doubling in 3 to 6 months. But the emu scandal plagued by auctioning of emus at fire-sale prices played spoilsport. Payments stopped and investors' concerns surmounted. Thus, oversupply, increased costs and greed led to the fall of the emu farming business. With more than half of India's emu farmers leaving the business and the investors losing money, the emu business is in a state of limbo.

04:40
 
On the back of profit booking across index heavyweights, particularly capital goods and commodity stocks, the key indices in Indian equity markets languished in the red for most of today's session. The BSE Sensex was trading lower by around 278 points at the time of writing. Key indices in Asia closed lower today, while Europe has opened flat to negative.

04:50  Today's investing mantra
"The function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future. If the margin is a large one, then it is enough to assume that future earnings will not fall far below those of the past."- Benjamin Graham
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18 Responses to "No more 'Mallya's for 'Kingfisher's?"

THIRUMURTHY R

Oct 2, 2013


There are many Mallyas in the crony capitalist system of India. He stands out because of his flamboyance coupled with bungling in managing his Airlines. Things are slowly changing now for the better for a variety of reasons too well known to repeat here. This process will pick up momentum. It is difficult to say if some corporate honchos are trying to close shop in India and forage in other markets because they are uncomfortable with this emerging dynamic or because they face genuine problems of bureaucratic hurdles. The latter had always been there. So what gives now?
Branch mangers and senior officials of Nationalised Banks succumb to political pressure in sanctioning loans. If they don't they won't get their promotions. They will be transferred to godforsaken places or 'kicked upstairs' to 'innocuous' positions. This is the root cause of bad loans.
It is time to privatise all Nationalised Banks and prevent them from being plundered by the powerful.
The Government at the same time should enact strict laws for healthy oversight and control of Banks after Privatisation to make sure Banks work as genuine financial intermediaries between depositors and entrepreneurs and not as speculators in various financial instruments/markets. The latter is 'financialization' that promotes greed and the excesses that resulted in the financial meltdown of 08-09.
This also can be considered : Civil arrest under Section 51 Order 21 Rule 37 of CPC 1908 for imprisoning judgment debtors must be suitably amended by legislation to ensure that “element of bad faith beyond mere indifference to pay in form of some deliberate disposition” has statutory sanction in line with the Supreme Court Judgment in the case of Jolly George Verghese and Anr Vs The Bank of Cochin in Civil Appeal 1991 of 1979. Simultaneously Corporate Laws should also be amended to make sure that gross negligence tantamounting to fraud on the part of the Management of companies invites strong legal action, notwithstanding their limited liability clause.

Like 

s. Jeyakumar

Oct 2, 2013

Yes. Change in management will definitely help provided that there shouldn't be any interference from ministry because the minister and the owner are in hand in gloves. Before change the existing management, the existing promotors should be punished for will full in action.

Like 

THIRUMURTHY R

Oct 1, 2013

Civil arrest under Section 51 Order 21 Rule 37 of CPC 1908 for imprisoning judgment debtors must be suitably amended by legislation to ensure that “element of bad faith beyond mere indifference to pay in form of some deliberate disposition” has statutory sanction in line with the Supreme Court Judgment in the case of Jolly George Verghese and Anr Vs The Bank of Cochin in Civil Appeal 1991 of 1979. Simultaneously Corporate Laws should also be amended to make sure that gross negligence amounting to fraud on the part of the Management of companies invites strong legal action, notwithstanding their limited liability clause.

Like 

THIRUMURTHY R

Oct 1, 2013

There are many Mallyas in the crony capitalist system of India. He stands out because of his flamboyance coupled with bungling in managing his Airlines.

In India things are slowly changing now for the better in many areas for a variety of reasons too well known to repeat here. This process will pick up momentum.

It is difficult to say if some corporate honchos are trying to close shop in India and forage in other markets because they are uncomfortable with this emerging dynamic or because they face genuine problems of bureaucratic hurdles. The latter had always been there. So what gives now?
Branch mangers and senior officials of Nationalised Banks succumb to political pressure in sanctioning loans. If they don't they won't get their promotions. They will be transferred to godforsaken places or 'kicked upstairs' to 'innocuous' positions. This is the beginning of loans going bad.

Wilfull default then happens with impunity. Part of the loans go to the political patrons of the borrowers. What are bad loans for Banks are very good loans indeed for politicians and some senior bureaucrats.
It is time to privatise all Nationalised Banks and prevent them from being plundered by the powerful.
The Government at the same time should enact strict laws for healthy oversight and control of Banks after Privatisation to make sure Banks work as genuine financial intermediaries between depositors and entrepreneurs and not as speculators in various financial instruments/markets. The latter is 'financialization' that promotes greed the excesses that resulted in the financial meltdown of 08-09 in the US.

Like (1)

Amit Sengupta

Oct 1, 2013

No- it won't. Our politicians will then find yet another play ground for their spoil-sport. It will be too naive to accept that our bankers were professionally so naive to take as big a risk as this. Probably there are more than what we know in the rise of the airlines.

Like (1)

P.SUBRAMANIAN

Oct 1, 2013

Dear,

Certainly the change of management will act as a deterrent for willfully defaulting managements.

Pranam,
P.Subramanian

Like (1)

Joseph

Oct 1, 2013

There are visible signals very early on which show that a Company is on the track to "sickness". The problem is that the financing agencies often fail to see these signals or sometimes turn a blind eye to it. A Company does not go sick overnight. It takes quite a while. And particularly in the case of listed companies, when unaudited results are published every quarter, diagnosing the sickness should not be an issue for experienced financial professionals. There is too much of focus on P&L related matters but scant notice is taken of cash flow related norms - which can throw up signals quite early. Yes, a change in Management, well ahead of time, can definitely help.

Like (1)

nrhk

Oct 1, 2013

no change will happen as both politicians who head government and businessmen hold same traits. They get the support from bank chiefs who are appointed by them. changing platform or stage and playing same role is called DRAMA

Like (1)

M Rao

Sep 30, 2013

Change in manager representing the bank/ lender with over riding authority over "Mallyas". Seizing of all material assets of mr Mallyas to compensate the lenders to the extent possible. Holding the other Directors and Advisers on the board accountable as they must have enjoyed a lot of patronage when the going was good. Thorough review of all investments made ever since the banks started lending big monies. Even Bank management should be held liable for failure to closely monitor and put barriers. What were the internal auditors doing. Are they in collusion? Identify a few top officers who were hand in glove with the owner and ensure they provide more info and leads that can show if some funds have been siphoned out. Study their prosperity profile !

Like (1)

Umesh Sharma

Sep 30, 2013

it is the tragedy of Indian corporate world.They cry about higher interest rates.They Squeeze the share holders dry by denying the dividend for years altogether.But when it comes to the salaries of CEO there is no effect whatsoever In fact CEO gets better salary and perquisite as happened in the case of Kingfisher CEO.If any reforms are required then there should be a stipulation linking the salaries of top CEO and the dividends paid and salaries paid to the workers.Anything paid in excess should be taxes heavily and all payments must necessarily come from the profits or the majority share holders/promoters should foot the bill without burdening the minority share holders who are moot spectators to the mishandling of the company's affairs

Like (1)
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