Sucheta Dalal :Kingfisher: Banking imprudence crony capitalism failed regulation & poor corporate governance
Sucheta Dalal

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Kingfisher: Banking imprudence, crony capitalism, failed regulation & poor corporate governance  

February 22, 2012

While the civil aviation ministry has destroyed Air India, bankrupt Kingfisher which is siphoning away the state-owned carrier’s passengers, is being supported by taxpayers’ money !

Moneylife Digital Team

The saga of Kingfisher Airlines’ financial problems and its potential bailout exposes ugliest face of Indian business—crony capitalism, breakdown in corporate governance, poor regulation, banking impurdence and complete lack of accountability at all levels. Ironically, it is happening at a time whey Dr Veerappa Moily, minister for corporate affairs made an impassioned speech in Mumbai urging corporate India to have better governance standards, talked about protecting investors and spoke of instituting patriotism awards for Indian companies.

The Kingfisher story, clearly anticipated and documented by Veritas, a Canadian research firm, in September 2011 has played out as anticipated by this hard hitting report. The report titled, ‘A Pie in the Sky’ wrote: UB Holdings (‘UB’ or the ‘Company’), the parent of Kingfisher Airlines (‘KAIR’ or ‘Kingfisher’), is teetering on the verge of bankruptcy, and incidentally, so is KAIR. It also says that the true state of affairs are not reflected in the share price of the company and warned, right then, that investors should “sell the stock and salvage whatever value they can” out of it. Unfortunately, under pressure from our government, Indian bankers were in no position to do the same. Veritas also examines the state of the parent UB Holdings, in a report whose title says it all: “Debt Recast: Deadman Walking …” but more about that later.

What can be a more forthright description of the state of affairs than this? Veritas writes: “We believe that KAIR’s book equity has been wiped out although audited financials pretend otherwise. The airline is burning cash at a rapid rate, we estimate Rs301.10 core ($ 65 million) in the first quarter of 2011-12, is in a business that requires capital perpetually, has no pricing power given six carriers fighting over the major hubs in India, is dependent on the vagaries of the price of oil and the largesse of state-run financial institutions in India, and its parent UB has run out of financial room to accommodate the needs of this capital-starved child.

Moreover, in spite of the so-called debt recast, we believe that once the non-cancelable operating and financing lease commitments of KAIR are included, KAIR’s enterprise value is less than its contractually required cash obligations, implying negative residual equity value for KAIR, as illustrated in Figure 1. (All USD amounts @1USD = Rs46.45, 9th September 2011).”

Despite this situation, in the past five months, banks have done nothing to prevent Vijay Mallya continuing to burn cash as this rate, even to protect their own and ultimately taxpayers’ money. So bad are Kingfisher Airlines’ finances that they will drag down its parent United Breweries, too. But that is if Dr Mallya is ever made to pay and if banks are not forced to swallow his losses. Veritas says: “UB, which has marketable assets of Rs4713.40 crore ($ 1,037 million), compared to guarantees provided on behalf of KAIR of Rs16,853 crore ($ 3,638 million), is also staring into a black hole. We believe that the ill-conceived foray into the airline business has already cost UB shareholders dearly, and that their ownership of India’s premier liquor and beer assets has been sacrificed at the altar of egoistic ambitions.

More importantly, we believe that unless the banking institutions have provisioned judiciously for the debt provided to KAIR—approximately Rs4567 crore ($ 986 million) in loans to Kingfisher in addition to standby letters of credit, etc—it renders the disclosed capital position of the banks unreliable.”

At this stage, a comparison with how the government has behaved with the national carrier Air India is inevitable. Veritas calls calls the “civil aviation ministry involving Air India—the state owned carrier—to pull its act together duplicitous”. It adds: “Our view stems from the fact that it could be on the diktat of the regulatory authorities involving various ministries of the Government of India that an unviable airline, KAIR, which is competing against the incumbent state carrier and siphoning away its passengers on both the domestic and international routes, is being supported via taxpayer-funded financial institutions.

It is not only the financial institutions that are suffering. As per the fiscal 2010-11 auditors report, KAIR was also in default of the dues owed on behalf of its employees to regulatory authorities, which it doesn’t count as debt. As per the auditors of Kingfisher, “Undisputed amounts payable in respect of employees state insurance of Rs0.75 lakh ($ 1,619), provident fund of Rs43.80 lakh ($ 94,564), tax deducted at source of Rs422.98 crore($ 93 million), service tax of Rs10.48 crore ($ 2.3 million), professional tax of Rs2.46 lakh ($ 5,412) (In all cases relating to the years 2008-09, 2009- 2010 and 2010 - 2011) and fringe benefit tax of Rs 4.51 crore ($ 1 million) (balance of tax and interest for the financial year 2008-09). The due dates for these amounts are as per respective statutes.

Clearly, KAIR is funding itself at the expense of its employees and the Indian exchequer, to which it owed tax deducted at source on behalf of its employees of Rs42.29 crore ($ 93 million) as per the 2010-11 auditors report”.

If all these facts were available to a Candian company, why was the civil aviation ministry and the tax authorities so soft on Kingfisher? Here is how blunt Veritas is about the UB group: “We also believe that the current management of UB has lost all legitimacy to run the vast liquor and beer business, and that the financial institutions should auction the collateral to the highest bidder and recoup whatever is left for their respective shareholders”.

Now here is what Veritas says about “Deadman Walking” —the dubious debt recast that is being fed to us, a gullible public. It says, “In our view, the debt restructuring touted by KAIR is nothing to write home about. We believe that non-performing    loans    have    been rechristened/repackaged into subordinated debt, and that Kingfisher has defaulted on its obligations is unquestionable. We do not believe that KAIR’s antics would have found any takers in a responsible credit market and that the airline would have been liquidated by now.
During 2009-10, Kingfisher defaulted in principal repayment of Rs203.10 crore ($ 45 million) and overdue interest of Rs 81.6 crore ($ 18 million), for a total default of Rs284.7 crore ($ 63 million). Between July 2010 and March 2011, KAIR defaulted on interest payments of Rs349.80 crore ($ 77 million). Foregone principal repayments are undisclosed. Therefore, from the beginning of FY09-10 to the end of FY10-11, the airline defaulted on dues of at least Rs634.50 crore ($ 140 crore) to the financial institutions. (Data for the period April-June 2010 is unavailable.)

Clearly, the loans given by the banks to KAIR are impaired and therefore under the pretext of a debt recast, the banks have converted some of these unpaid principal and interest amounts into cumulative convertible preferred shares {Rs755 crore ($ 166 million) of term loans converted into CCPS of 7.5%} and cumulatively redeemable preferred shares {Rs553 crore ($ 122 million) of term loans converted into CRPS of 8% with a maturity of 12 years}.”

Veritas says that Kingfisher treats its auditors with disdain. Specifically, it says, “That management of KAIR is treating its auditors with contempt, and is off-side Indian accounting standards, is clearly evidenced by the following quote from its FY09-10 auditors report”. Well, Dr Moily, over to you now. What will you say to the gaggle of chartered accountants and company secretaries who applauded you this morning about corporate governance standards of one of our most high profile companies? That too one that is run by your colleague in parliament, Dr Vijay Mallya? Will you demonstrate to patriotic Indians that you will act to protect taxpayers’ money?

Veritas had earlier written a damning report on two Reliance companies, where it alleged that Reliance Industries and Reliance Communications (RCom) have short-changed investors by over Rs25,000 crore at RCom and that profits have been inflated at RCom between 2006-2010 by almost Rs11,000 crore. We had reported on this earlier

-- Sucheta Dalal