The Vijay Mallya affair continues, like a B-grade Bollywood potboiler in which the villain smartly eludes a bunch of bumbling cops. The flamboyant businessman, whose airline company made a spectacular crash in 2012, is wanted by a clutch of law enforcement and regulatory agencies, and banks and financial institutions whom he owes in excess of Rs.9,000 crore—Rs.6,963 crore being the principal and the remainder being the interest on the accumulated borrowings. But there are others too waiting for the prodigal son to return, among them his erstwhile employees, to many of whom he owes unpaid salaries. Then there are suppliers such as the fuel companies, component suppliers, airport operators, caterers and many others to whom Mallya’s companies owe substantial sums.
After playing hide-and-seek for so long, suddenly, out of the blue came Mallya’s recent offer, from a faraway location, to pay a not-so-insubstantial sum of Rs.4,000 crore. As always in such cases, the devil lay in the details. For one, the offer of a one-time settlement, to be made over six months, would imply that banks would get only about 40 per cent of what he owes them, and that too with all the uncertainties associated with Mallya. But even more serious are the precedents that such a heavily discounted settlement would set for the many more such cases that saddle the loan books of banks. The third question that Mallya’s offer poses is, Why should the banks accept his offer when his “net worth” in the four companies in which he has significant holdings—United Breweries, Mangalore Chemicals and Fertilizers, UB Holdings and the defunct Kingfisher Airlines— amount to more than Rs.7,000 crore?
All in all, the sordid details of the Mallya affair are not merely about negligence by banks, 17 of which have lent money since Kingfisher was launched in 2005, but of how regulators looked the other way and policymakers and government agencies systematically sacrificed the public interest and public money to serve the interests of a corporate group. The critical question then is, How did Kingfisher Airlines manage to accumulate loans to this extent, getting past multiple gatekeepers with such finesse and ease? The answer to this would explain, among other things, how multiple statutory bodies—law enforcement agencies, regulatory agencies, tax authorities, audit firms and government Ministries and departments—were part of the process that allowed Mallya to milk the system for so long.
Mallya’s recent flight to the United Kingdom and the drama surrounding the recent summons the Enforcement Directorate (E.D.) issued illustrate how permissive the system has become, especially when it comes to dealing with a “wilful” defaulter, as several banks have declared Mallya. The E.D.’s summons initially sought Mallya’s appearance on March 18 in relation to a money laundering charge against him by the Central Bureau of Investigation (CBI), but after he expressed his inability to appear on that day, the E.D. was considerate enough to reschedule his appearance to April 2. Mallya failed to appear even on this date and cited his ongoing plan for a settlement with the banks to seek an appearance in May. The E.D. rejected this and recently issued its third and “final” summons seeking his appearance before it on April 9.
Earlier, the CBI drew attention for what many considered its failure to stop Mallya from leaving the country. This happened even as the Supreme Court was hearing a petition from a clutch of banks seeking a restraint on his access to funds as long as he owed them money. The E.D.’s investigations follow the CBI’s registration of a first information report last year pertaining to the means by which Mallya group companies were able to get loans beyond the credit limits set by banking regulations. The E.D.’s money laundering probe is exploring whether “slush money” was sent overseas and then brought back in (technically termed round-tripping) to manipulate share prices of the group companies. Meanwhile, the Serious Fraud Investigation Office (SFIO) is reportedly probing the allegedly inflated valuation of the Kingfisher brand, at over Rs.4,000 crore, which helped Mallya group companies access higher volumes of credit from banks. The SFIO is also probing the diversion of funds into companies and avenues the credit was not provided for. In a statement issued recently, Grant Thornton India LLP, the audit and consulting firm that valued the brand, said it was cooperating with the investigations and that the valuation was legitimate and “appropriate in the context of when it was done.”
The regulator of the stock exchanges, the Securities and Exchange Board of India (SEBI), is probing allegations of insider trading, listing agreements and violations of corporate governance norms. SEBI is also probing Diageo’s acquisition of United Spirits Ltd (USL) after Mallya, in desperate need of cash, sold it to the multinational company.
Apparently, SEBI is now reviewing the terms of the deal that allow Mallya to escape free of any liability following investigations of the company’s books. SEBI is also investigating the role of company directors and auditors who validated the deal. Diageo is to pay Mallya $75 million over five years ($40 million in the first year) to relinquish his final residual stake in USL, and the deal provides for “safeguards” against any further liabilities for Mallya. The banks had recently moved the courts and debt recovery tribunals, pleading that Mallya be prevented from accessing these funds until he cleared his dues to them.
Apart from Grant Thornton, PricewaterhouseCoopers, Deloitte LLP and Walker Chandiok & Co. are also under scrutiny, with a slew of regulators seeking answers on their valuation, auditing and due diligence of the United Breweries Group companies over the last few years.
A complex web The multiple tracks the investigating agencies, regulators and tax authorities are now pursuing give the impression that the regulatory noose is tightening around Mallya, that the endgame is now on for him. They also may appear to suggest that the government is cracking the whip on wilful defaulters such as Mallya. Nothing could be further from the truth. For one, it is too little and too late because Mallya may have already siphoned off funds that could be tapped from the corporate entities that could be legally linked to him.
A second aspect of the problem is the fact that a long and tortuous process awaits the institutions that are trying to get hold of whatever little of the asset base that Mallya and his companies may yet possess. For instance, proceedings before the debt recovery tribunals have been on since 2013, and after more than 80 hearing sessions, nothing has moved as far as the lenders are concerned.
The apparently complex mechanism Mallya used to access bank funds is actually based on a very simple modus operandi . This is inextricably tied to Mallya’s business operations, which has been characterised by three important features. First, the hub of his empire, from the time of his father, Vittal Mallya (from whom he inherited the major part), has rested on the cash-rich liquor business. The second aspect of his business model, which has played a critical role in Mallya’s high-profile rise as an airline promoter, is the use of a highly leveraged financial model to fund the business. Linked to this is also the apparent diversion of large volumes of funds within the UB Group.
For instance, Diageo found a Rs.2,100-crore hole in the books of USL in 2015 and, in fact, sought Mallya’s ouster from the company’s board. The third aspect, which is often missing in much of the media accounts of his rise and fall, pertains to the liberal policy regime governing aviation. To make sense of the Mallya affair, it is important to see it not merely as a case of a “rogue” entrepreneur but as a case of a system that was open to abuse in the name of reforms. At the centre of the drama is United Breweries Holdings Ltd, the holding company that is the fulcrum on which the Mallya empire turns. It is through this entity that he controls United Breweries, his prime liquor company and key generator of revenues for the group. As the airline business floundered, Mallya, it appears, leveraged the interconnected nature of the companies he owned to draw funds from “healthier” parts of his empire to fund the bleeding venture. In 2009, a year in which Kingfisher Airlines made a loss of Rs.1,600 crore, IDBI Bank extended a loan of Rs.900 crore. The justification for this loan was that it was backed by the value of the brand, then valued at over Rs.4,000 crore.
The media’s amnesia is striking; none of this is new information. For instance, six years ago, the Reserve Bank of India permitted the consortium of banks led by State Bank of India to do what was then called a “one-time” debt-restructuring package. This followed intense lobbying by the aviation industry seeking relief from the Union government. Of course, even then, banks did not seriously believe the “one-time” promise, and believed that the loans were very likely to turn non-performing. This was vindicated in October 2012 when the civil aviation regulator revoked Kingfisher Airlines’ licence and later withdrew the time slots allotted to it at the country’s airports. In fact, the E.D. is now reported to be exploring whether the central bank followed due diligence norms while deciding to extend the restructuring package to the civil aviation sector in general and to Kingfisher in particular.
Airline fiasco Mallya successfully used his commanding presence in the liquor economy to build a facade of success. The high degree of leverage was made possible because bank funds were available “on tap” to Mallya. A combination of dressing the accounts and large-scale diversion of resources enabled Mallya to continue the milking of the banking system.
But all this would have not helped if it were not for the “reforms” that rocked the aviation business. To make sense of this, the decline of Air India needs to be appreciated. The systematic running down of the public enterprise during the United Progressive Alliance regime through a combination of means created space for entities such as Kingfisher Airlines. While the national carrier was brought down by the sheer weight of the loans it had obtained to fund large-scale, and unwarranted, aircraft purchases, from which it is yet to recover, it also ceded lucrative routes to private carriers such as Kingfisher. The euphoria that accompanied the launch of private airlines quickly evaporated, but the axe fell quicker and harder on Kingfisher because it never had any pretensions of being an economy carrier. This positioning too was seen as keeping with Mallya’s image as the “King of Good Times”. Speaking to a TV anchor recently, Finance Minister Arun Jaitley—Mallya’s Rajya Sabha colleague; Mallya made it there thanks to the support from Jaitley’s party—said Mallya had given private entrepreneurs in India a “terrible name”. The sudden rush of activity by the government and its various agencies and the expression of righteous indignation at the ways of a wayward businessman do not hold out much hope that such upstarts will be nipped in the bud in the future.