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What We Could Learn From the Vijay Mallya Episode - Outside View by PersonalFN
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What We Could Learn From the Vijay Mallya Episode
Mar 31, 2016

The Securities and Exchange Board of India (SEBI) recently banned willful defaulters from accessing capital markets. This will restrict willful defaulters from:

  • Issuing fresh debt to public
  • Issuing fresh equity
  • Assuming positions on company boards
  • Establishing capital market intermediaries such as mutual funds, brokerage houses
  • Controlling any other listed entity

This move is being considered as a crucial development against the backdrop of a quiet exit from the poster boy of Indian willful defaulters. Bankers have been citing irrational reasons about being unable to recover money from him for so long.

Cut back to the "Good times"...

Kingfisher started commercial operations in 2005. The brand became a suggestive icon to the exuberance of Indian elite. Many politicians, corporate, journalist experienced the "joyous rides" on the "kingmakers" personal invitations. The newly launched airline company achieved important milestone one after the other in no time (except being profitable). The brand grew; sadly, finances eroded.

Milestone turned into millstone...

United Breweries acquired 26% stake in Air Deccan, a low cost carrier in a whopping Rs 550 deal in 2008. lust for power and control yielded the end of "good times" as the writing on the wall. Within a matter of one year, the Kingfisher debt soared from close to Rs 1,000 crore to a humongous total of Rs 5,600 crore plus. The number reached the Rs 7,000 crore mark by 2010-a year in which banks restructured loans given to Kingfisher for the first time. Kingfisher halted operations in 2012.

READ THIS CAREFULLY: The devil is in the details

Banks converted Kingfisher's Rs 1,400 crore worth loans to equity at a huge 60% premium over the prevailing markets price then. Interestingly, the banks as well as the company claimed that the deal was carried out based on the floor price formula of the SEBI, justifying the premium. Bankers went ahead to call it a winning proposition. If that wasn't enough, they justified their lending against the "brand of Kingfisher", estimated to be worth Rs 4,100 crore.

And, the worth of the brand now?

Information by official sources of SBI to DNA (story published on February 16, 2016) states, the brand value had decimated to a paltry Rs 6 crore.

What makes the owner of "Royal Challenger" a willful defaulter?

Kingfisher Airlines is alleged to have diverted funds to United Breweries Holdings and other group companies. Mr. Mallya is also said to have siphoned funds. This is probably how he continues to paint the town red, despite drowning in a flood of red lines of debt l.

The "liquor baron" has taken taxpayers of India for a ride. While he has been blatantly refusing to service the debt on his books, he was busy doing something nastier.

Would you like to know what was he doing then?

  • Pledging his stake in group companies to raise more capital
  • Teaming up with other business groups to avoid hostile takeovers of some of his companies
  • Delay salaries of Kingfisher employees but at the same time cashing in his liquor brand.
  • Cheering his Formula One team
  • Buying IPL team
  • Releasing Baywatch-style calendars
  • Hosting his annual parties on his million dollar worth personal yacht

What banks were doing then?

Killing time (and maybe killing their balance sheets too). They extended the time to declare the "king of good times" and his companies as willful defaulters. Now, even a layman won't buy a stock of a company that has never made a profit for 60% premium over market price. Was that "goodwill" or "goodwill gesture" that made banks lend the "King of good times" even in bad times?

Why aren't any private sector banks largely involved in the Kingfisher fiasco? Private banks are not obliged to follow a "yes sir" approach. The chiefs are accountable and answerable to the board for their decisions. Usually, the risk management of private banks is watertight.

What was the income Tax department doing?

It furnished kingfisher employees with notices demanding tax on income they hadn't received/earned (but as per law it was accrued to them, so the department can take the action.). Only a few days ago, the Government realised this and asked the department to stop doing so.

What were the political parties doing from 2008 to 2016?

It appears that the flame of hope to encash close association with him burned bright. The Congress and BJP party as well as the Janata Dal (S) has been merciful to the "king of good times". These parties have supported his candidature in the Rajya Sabha-where he has been accused of having utterly misused the loot funded by taxpayers. However, BJP had distanced itself from being the supporter of Mr. Mallaya, pointing to the position of the party in 2010, where it decided not to back him. What is puzzling is this-it took BJP six years to disapprove media speculation of its support.

The question is...

Is the SEBI directive prohibiting willful defaulters from accessing markets enough to ensure the interests of depositors and investors in debt funds are protected? Recently, the SEBI also warned mutual funds against investing in companies with the "willful defaulter" tag. Unfortunately, deposit holders of banks or investors of the mutual funds are not the ones who decide to whom the money is lent. They can only hope that their money is in the safe hands.

Are fund houses going the "banks" way?

It may come to you as a surprise that, Franklin Templeton Mutual Fund (India) abruptly sold off its investments in another debt laden company (which is not yet a willful defaulter) after being downgraded recently by the Crisil, an independent rater.

PersonalFN covered the downgrade story and that of the exposure of the fund houses to Jindal Steel and Power Limited (JSPL) on February 22, 2016.

Franklin Templeton has made a steep loss of in excess of 30% on its acquisition cost. Some debt schemes under its management had as high as 7% exposure to JSPL. Imagine the bearing of a loss of 30%+ on the Net Asset Value (NAV) of the scheme holding 7% exposure. Is that acceptable from a company that flaunts its world class reputation?

The poor (powerless) taxpayer .... continues to them bail out.

  • The layman is paying price for the arrogance and overconfidence of fund managers
  • The layman is paying price for the "sweet heart" deals of uncrowned kings.
  • The layman is paying price for the drama of blame game (that follows any fiasco)

How long this will continue? Nobody knows. Regulators come up with directives, the Government issues run of the mills statements and investors are taken for granted, as usual.

What investors should do?

As remains the question of Dr. Vijay Vittal Mallya, the law decides his fate. To be fair, it's a systemic failure. Rs 9,000 crore worth story has surfaced now, but this might just be the tip of the iceberg.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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