Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
General

Opinion: Of Mallya, the Kingfisher Mess and The Failure To Hate Bankers Instead

vijay-mallya-sbi-loan-wilful-defaulter.jpg

The Mallya controversy never ends. After the death of Kingfisher Airlines in 2012, the banks that needed to get paid a massive amount of money seem to have woken up. The money they are owed is apparently more than 7,500 crore rupees. The problem? There is nothing in the airline. The planes were rented, the offices were rented, you can’t own people, and the operations were simply dependent on a license that was taken away in 2012.

vijay mallya sbi loan wilful defaulter

In 2016, a flurry of activity has brought focus back on Vijay Mallya, the flamboyant owner of the airline, because he celebrated his birthday in a big way, continues to own and sponsor cricket teams, and was the face of Brand Kingfisher, a beer brand famous across the country. Just recently, his flagship company, United Spirits Limited, was bought by Diageo, who discovered weird large loans to other UB group companies (controlled by Mallya) that had no reasonable explanation. In February, USL decided to kick Mallya out of the board, paying him $75 million as a non-compete fee, and would withdraw all repurcussions on money lent to UB group companies. 

This would be a good thing, except: Kingfisher Airlines’ loans have been guaranteed, apparently by Mallya and by UB Holdings. We know this from a recent SBI Auction Notice: 

Kingfisher

So the loans of Kingfisher were guaranteed by UB Holdings – a listed company – and Vijay Mallya. Mallya is now listed as a “wilful defaulter” by some banks, and he has challenged this label from United Bank of India (though other banks have also called him that).

The fear of him having just left the country has made people go hopping mad because

  • How can he leave without paying his debt? 
  • How can he party while his debt is not paid?
  • How dare he influence the banks to give him loans and then not pay back?

Etc.

What follows here is my view of this exercise. 

Mallya isn’t the one who took the money. Kingfisher Airlines was. And in the concept of limited liability he isn’t liable for the money. There is one exception – if there is fraud, like in the NSEL-FT case, where the limited liability veil can be lifted if the fraud was conducted in connivance with the promoter. In this case there is no case of “fraud” against Mallya – even the labour ministry, which tracked the PF submissions, seem to have said the company had met its obligations.

Mallya only has to repay because he gave a personal guarantee for his loans. The law doesn’t allow “summary” attachment of a guarantors assets. The banks apparently got a list of assets that amounted to Rs. 1,500 crores. They attached what they could – the Kingfisher house, a villa in Goa and so on. But for the rest they have to go through courts – and while some say they have, I believe the fault here lies with the banks for not attempting to enforce guarantees fast enough.

There isn’t any law that prevents banks from actually taking securities as collateral. And many do. So why didn’t banks take Mallya’s 52 lakh shares in the listed company, UB Holdings (market price: Rs. 18), and the 2.13 crore shares of the listed United Breweries (Market price: Rs. 802) as collateral? Mallya’s 2 crore shares in UB Holdings are already pledged – we don’t know which bank has them. Why isn’t that bank – whoever it is – selling those shares and recovering money? Remember – you don’t even have to go to a court to sell these shares if they are pledged to you. Yet, they don’t. Are we going to blame Mallya, or shine a torch on the face of the bankers who have been sleeping?

And then: the second guarantor for the above loan, at least, is the listed UB Holdings Ltd. This is a listed company with assets. You can proceed much faster against a listed company in a court. And yet, the banks haven’t progressed much there. Why not clean up UB Holdings? It owns about Rs. 4,000 cr. worth of shares (United Breweries and United Spirits alone) and about 1,000 cr. of fixed assets. All they seem to have got is a villa that UB Holdings owns in Goa, and nothing else. They didn’t even get the shares pledged to them. Why would a banker not do that? Why take a personal guarantee of a company and not make shares pledged against the loan?

The answer seems to be: Political pressure. I call BS. Banks don’t lend such large amounts on pressure – they lend through bribes, as we have seen in the Bhushan steel case, but after a smart CAG, they don’t really have to lend to any company under pressure. Bankers can always get written orders if they need to protect themselves. And if we let bankers go with this excuse, we’ll never really make banking better – they’ll always hide behind the word “pressure”. 

Only SBI among all the bankers seem to have understood the situation enough to file multiple cases and to seize property. And even that isn’t enough. As much as I feel Mallya should honour his personal guarantee, it’s also silly of banks to have asked for one without attaching his assets. Taking someone’s word for it is not feasible in this country – can you believe that a bank will let you or me say “okay, don’t worry, we’ll pay” work as a guarantee? Even for educational loans for children that are guaranteed by parents, banks demand to take a property as collateral. Why did they spare Mallya? Don’t give me the pressure bullshit.

Mallya is an NRI and lives at least six months a year outside India. His leaving is no big deal. And he may return too, after the brouhaha dies, or worse, if a court rules that his personal guarantee is invalid. Which, by the way, has happened – many high courts have ruled that a personal guarantee for a loan taken by a corporate entity may not be enforceable. After all the person giving the guarantee didn’t get the money, the company did. 

Summary and Notes

  • Mallya didn’t personally borrow 7500 crore. He is only liable because a company in which he was shareholder and manager – which is separate from him – had him guarantee the loan while borrowing that money. By their own admission, banks only knew he had 1500 cr. Given how courts work, a judge can easily say his liability is restricted to 1500 cr.
  • And then, Mallya claims that pledged shares and deposit of money in courts have returned 2,400 crores already to banks. SOme banks, like HDFC and Yes Bank, have sold around Rs. 800 cr. of shares in November 2015 for recovery. 
  • Banks need to have taken more action earlier in the sense of actually taking more shares pledged, or selling their pledged holdings. Mallya owns about 1600 cr. worth shares in UB even now, and they remain pledged/unsold even now.
  • Banks need to pursue UB Holdings, the co-guarantor of the loan, even more – they own Rs. 5000 cr. of assets at the very least.  
  • Our hatred of Mallya is because of his hubris and flamboyance. There are worse offenders – JP Associates and JP Power have massiv
    e defaults in their FCCB setups and we don’t really care. Bhushan Steel’s chief was arrested trying to bribe the top officials of a bank – and the Steel company has over 36,000 cr. of loans. It’s been extended through the 5/25 scheme – just when Steel prices are at decade-lows and it’s obvious India can simply not compete. We don’t hate these guys as much while we should hate them four times as much because of the amounts involved. (And one has been CAUGHT BRIBING SOMEONE!) 
  • While I find Mallya’s default distasteful and his choice of lifestyle over the top, I cannot allow my feelings about his obnoxiousness rule over the fact that the law has to be applied equally for everyone. While we should ask that his guarantees get tested in court, he should not going to jail because we hate him. A democracy doesn’t mean that you get to jail people if the majority doesn’t like them. 
  • I also find it distasteful that the bankers that lent to Mallya get away without a single refrain. 

This is not a post about stocks, just an opinion. 

Disclosure: I own a few shares of United Spirits. Not that it matters, because it’s owned by Diageo now and Mallya’s off the board. 

  • Paddy says:

    Agree with you completely on this!. Technically there is very little that banks can do with a personal guarantee from Mallya!.
    All stakeholders are equally liable here:
    The Banks that lent him without due diligence, The boards that approved conversion of debt into equity in 2010 and then most important of all the Credit Boards that sanctioned loans with the KF Brand as collateral – (That’s like joke of the millennium!!!). And by the way who in the heck, and how, did Grant Thornton value the Brand for 4,000 Cr.
    Aside for some entertainment: It would be awesomely interesting to know, the thought process of bankers on leveraging the brand, selling it or licensing it in case there was a default?. What in the world where they smoking when they took the brand as collateral!!! – Well thats a case study in Branding and Marketing… 🙂

  • Rachel says:

    It has been found that Mallya wants to come to India back. I wish its a truth. LOL

  • kalyan says:

    After all the person giving the guarantee didn’t get the money, the company did.
    What kind of logic is that and why is that applicable to only company loans. When I give guarantee for a friend’s loan who defaults later, He is the one who got money. Can I get away with this logic? Courts interpretations some times are crazy. In this case I think it is either a brilliant lawyer or a corrupt judge.

    • No, it’s been done to dissuade banks from randomly taking guarantees when they should be taking direct collateral…

      • kalyan says:

        The concept of guarantee is to help the people/companies to get loans when they don’t have collateral but need money. Rulings like these make it difficult for genuine companies(startups for e.g.,) to get money based on just potential. In the ideal world one would have assumed that bankers did due diligence.
        Also there can be a rule saying that the guarantor has to provide some collateral. But can’t understand the logic of retrospectively saying guarantee is not valid. If there is such a rule that there should be a collateral and the banks ignored it, then I am wrong. But is there such a rule?
        Also shouldn’t the same logic apply to individuals loans.

  • Samarth says:

    I also agree with you completely.bankers should be hanged for giving such big loans without proper collateral.
    And Tax payers should be worried more about Air india. Impression that I have is that Air india takes 7500 Cr every year !
    We should just simple shut down Air India
    Samarth

  • Lucy Tucker says:

    You say that in a democracy one doesn’t get to jail people because the majority doesn’t like them – and yet Afzal Guru was killed to appease the collective consciousness of the country!

    • I went through the case document and I think that was an unfortunate comment there. It makes no sense in a country like India. And indeed, some of the co-conspirators have seen reduced sentences (one is out after “good behaviour”!).It’s a shame that we disallow even discussion on this topic, because it’s worthwhile to know why the death penalty for one versus only jail time for another.

  • Dinesh Nagpal says:

    When a SME/Individual approaches a bank for a loan against collateral. The banks track the nature of income to assess the strength of the borrowers ability to repay the loan. They have their ancient list of industries & sources of income used for calculation which are multiplied X times and in some cases specially income of Securities (yes even investment in equities not just derivatives which is understood as speculative) marked as COMPLETE NO. Hence, even a Warren Buffet would see his loan application even if it is backed by a collateral, rejected by banks in India (irrespective of his CIBIL record) but a Bhushan Steel / Jindal Steel / Jaiprakash would get “Manna from Heaven”. Which brings me to another worrisome issue. What will be the impact of this on NBFCs? Will SME/Individuals adopt the same stand (as they form bulk of loans for NBFCs) and approach Courts for protection.

  • Vamsy says:

    The common folk do not understand the difference between Legality and Morality. They often confuse between the two and seek to get their own sense of satisfaction once they see the Karma coming after men with low moral values. If that does not happen (as often), they resent their own lives and start keeping their own morals aside as it is an obstruction for achieving material things.
    It is in the best interest of the society as a whole to keep commoners ignorant of all the legal loopholes or else the plebs will start revolting and it will ultimately lead to the collapse of the society. Think what would happen if every Tom Dick and Harry start using limited liability concepts and starts exploiting the system. How many people will really start saving their currency in a bank if they understand how much is really insured for their deposits? Not to mention the entire fractional reserve system which is created and meant to do only one thing – transfer money from commoners to the elite.

  • Gautam says:

    Fully agree with your views. I have just one question. Why aren’t shareholders revolting and filing law suits?

  • Nikesh says:

    Really Nice and exahaustive analysis.
    Regards,
    Nikesh Sheth
    Expertmile.com

  • Vineet says:

    The anger is there because ordinary folks don’t get any relief in case of non-recourse loans, most people are hounded by ARC’s till they sell family silver or worse commit suicide, while big fish like Mallya with an army of lawyers can hide behind law.
    Mallya didn’t help his case either by posting pics of those parties. There are bigger fish who wear white kurta here and party in exotic destinations, they escape all scrutiny.

  • Kris says:

    Personal guarantee not enforceable? Why not? A majority owner of a corporation which is run as his “own” should be liable.