Sucheta Dalal :Kingfisher Airlines: Flying high at public expense
Sucheta Dalal

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Kingfisher Airlines: Flying high at public expense  

March 5, 2012

Kingsfisher, which has survived with the help of loans from public sector banks and a favourable aviation ministry, now wants more!

Sucheta Dalal

Every time the Congress-led government announces yet another bleeding-heart programme aimed at the poor, it ensures a few thousand new supporters for Team Anna. Indians are all for poverty alleviation, but not through mega-doles of the UPA government which seem to go straight into the pockets of netas. At the other end of the economic spectrum, industrialists in cahoots with politicians, are sucking tens of thousand crores out of inflated infrastructure projects. Only occasionally, a dogged litigation leads to path-breaking verdicts, as in the 2G-telecom licence scam. Most scams and swindles, including the plunder of Air India, are not even investigated properly.

A third mode of pillage is through the banking system. In the past few weeks, the finance ministry and the Reserve Bank of India (RBI) have voiced concern over rising non-performing assets (NPAs) of banks. Can someone explain why bank chairmen should not be accountable for these NPAs when they have recourse to a powerful SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act? Banks are ruthless in the use of SARFAESI provisions against small and medium enterprises, to the extent that they often destroy well-run businesses at the first hint of payment problems.

Meanwhile, the average hard-working Indian will foot the bill for government profligacy as well as bank NPAs (through recapitalisation) in the form of higher direct, indirect, municipal, state and Central levies and taxes; they will continue to face daily extortion for licences, passports, death certificates, registration and all the routine permissions.

In this situation, is it any surprise that the apparent eagerness to bailout the flamboyant Vijay Mallya’s Kingfisher Airlines (KAIR) is causing unprecedented anger among people? Mr Mallya’s public display of wealth and extravagance surpasses that of all Indian industrialists. His private jets, luxury yachts, art, homes in multiple cities and world capitals, even a private island near Monte Carlo, as well as his corporate indulgence in the form of an IPL (Indian Premier League) cricket team, Force India and horse racing make headlines everyday along with his parties, swimsuit calendars and Derby appearances.

Yet, as soon as he creates a deliberate disruption by cancelling flights because of financial problems, several union ministers use it as an excuse (in public interest) to propose yet another bailout of KAIR. Well, nobody really wants KAIR to be grounded or wound up; we want Mr Mallya to pay for his mismanagement and profligacy. As an MP, he had plenty of opportunity to lobby for policy change; he cannot now blame the airline’s losses on bad policy. Mr Mallya must be made to honour the guarantees provided against KAIR’s loans by him and his companies. He must also clear tax dues and provident fund payments as well as the money owed to public sector oil companies (over Rs800 crore). Further, no bailout can be considered without a change in management as was done with Satyam Computers.

Consider the saga of KAIR’s problems. At an investor presentation in June 2011, Mr Mallya said that the company’s total debt had dropped from Rs7,651.12 crore to Rs6,007 crore. This was after a financial restructuring (read bailout) which saw banks converting debt to equity at Rs62 per share—a steep premium to the market price, because KAIR was bankrupt. Reliable sources tell us that banks were arm-twisted to accept the conversion rate for KAIR shares which are now traded at Rs24 (1st March).

The high-spending Mr Mallya had told shareholders that banks had not only agreed to a moratorium on repayment, extended the tenor of loans and reduced interest rates (in a rising interest market) but also converted 30% of their loans into preference and equity capital. In return, Mr Mallya provided personal guarantees for KAIR as well as additional guarantee and collateral of Rs16,853 crore from United Breweries (Holdings) Ltd (UBHL) on which they earned a fat fee.  

Believe it or not, Mr Mallya was paid Rs50.87crore as ‘guarantee and security commission’ for this largesse, while UBHL earned Rs58 crore as disclosed in the 2010-11 annual report. This was questioned at the company’s annual general meeting since Mr Mallya had not claimed a commission, on a Rs2,799.56 crore guarantee provided in 2009-10, says PTI. Why haven’t these guarantees been invoked, especially when Mr Mallya and UBHL earned a whopping Rs108 crore by providing them? Isn’t this a classic example of heads I win (guarantee fee) and tails, the banks lose (bad loans)? In November 2011, the All India Bank Employees Association had demanded a parliamentary probe into the conversion of KAIR’s debt to equity; but it was simply ignored.

Banks, with the blessings of the RBI and the finance ministry, agreed to these terms without any attempt to improve KAIR’s viability. So losses continued to mount and the airline began to default on statutory payments and taxes. Any businessman knows that a default on depositing provident dues and tax deducted at source (TDS) attracts crippling consequences. Tax officials have unleashed terror over TDS dues which they insist is under pressure from the finance minister. Trading companies have been running helter-skelter after being threatened with attachment of bank accounts with TDS calculated on the full value of goods, when it was clearly applicable on their meagre commission income of 2% to 10%. Capricious government action is debilitating business under the guise of draconian tax collection methods. But action against KAIR was initiated only when inaction itself threatened to become an issue.  

Mr Mallya blames all his woes on the aviation policy; yet, KAIR and Jet Airways were big beneficiaries during Praful Patel’s tenure as aviation minister, that too at the cost of Air India and Indian Airlines, which were systematically destroyed and saddled with onerous debt. Even the Canadian Veritas calls the civil aviation ministry’s attitude to Air India ‘duplicitous’ and points out how KAIR was allowed to siphon away the national carriers’ passengers and was being funded by “tax-payer funded financial institutions.”

It is only when pushed to a wall that Mr Mallya recently converted some of the group’s loans to 5% additional equity in KAIR at the end of February. The conversion price is not in the public domain. This happened only when citizens’ protests against another bailout for KAIR increased and a public interest litigation was planned. Until then, Mr Mallya was confidently lobbying his Parliament colleagues to change the rules. On 27th February, he told Reuters that he had been ‘assured’ of a change in law to allow foreign direct investment in aviation.

A couple of days later, the assertion was modified to an expression of hope in his apology-explanatory letter to employees. It said, he expects a “notification permitting Foreign Airlines to invest upto 49 percent of the equity in Indian carriers” as has been “widely announced” by the civil aviation minister and decided by the empowered group of ministers. Unlike the protest against FDI in retail, Mr Mallya clearly expects that friendly MPs, cutting across all party lines, will push through the legislative change on the pretext of saving Indian aviation. Meanwhile, KAIR’s chief executive is talking up the company’s fortunes by telling the media that a 24% stake will be sold to two unnamed investors.

Politicians are aware that their actions will be closely watched to see whether KAIR and the loss-making and politically connected Jet Airways (allegedly) as well as SpiceJet get favoured treatment vis-à-vis Air India. After all, the opening up of civil aviation should be accompanied by the privatisation of the national carrier too. Will the Parliament act like Mr Mallya’s crony club or work at a sensible aviation policy that fosters fair treatment and genuine competition of public and private carriers?

Sucheta Dalal is the managing editor of Moneylife. Subscribers get free help in resolving their problems with select providers of financial services. She can be reached at
[email protected]


-- Sucheta Dalal