Vijay Mallya is more dead duck than bakra; banks are the real bakras

Vijay Mallya claims to be the wronged party because UBI declared him a 'wilful defaulter.' But does this matter when he owes banks Rs 7,000 crore and it is not obvious that he has assets to cover them?

R Jagannathan September 03, 2014 10:56:32 IST
Vijay Mallya is more dead duck than bakra; banks are the real bakras

Only in India will banks go around stating the obvious and then expect to be attacked for bad faith. Yesterday (1 September), the United Bank of India (UBI), itself in no great financial shape, declared Vijay Mallya a "wilful defaulter" on a Rs 7.5 crore overdraft. And the man who actually owes around 17 banks over Rs 7,000 crore on account of bad loans to his now-defunct Kingfisher Airlines, claimed this was being done "without a hearing".

"They are making me a bakra (sacrificial goat) because they want to set an example for other defaulters," he told The Times of India without any sense of irony. He should ask himself: how is it a crime to make an example of you when you are one who owes them money? Big money. Moreover, does it matter whether he is a "wilful defaulter" or merely a gigantic defaulter?

Mallya thinks he has lots of legal options even now, and knowing the dilatoriness of the Indian legal system, he may well get as many lives as the proverbial cat. But a victim he is not; a bakra he is not. If anyone is the real bakra, it is the banking system, which has been super-indulgent with a man who is a byword for indulgence himself.

If Mallya had been doing business in the US, he would probably have been a chapter 11 case - someone who could be filing for bankruptcy as bankers went after his assets. In India, he is busy bitching about his victim status.

An Economic Times story today (2 September) says his equity assets add up to around Rs 3,800 crore, which is far short of what he owes banks. While he obviously has a few more assets - a villa here, some holdings in the F1 team that he co-owns with a jailbird (Subrata Roy of Sahara Group), some other pricey realty - it is doubtful if they will cover all his dues. One estimate is that roughly Rs 6,000 crore of his total dues are covered by collateral. But who knows what they are worth when flogged in distress?

But this is where the script changes. Once you are declared a "wilful" defaulter, it sets in motion a downward spiral of financial credibility and creditworthiness. Your assets become caged assets, your ability to leverage your reputation reduces, your presence on your own company boards becomes untenable.

So when Mallya says he has more legal options, he may be technically right, but the countdown to business shrinkage has just accelerated. His new business partners, Diageo and Heineken, who helped ease his cash position by buying chunks of his booze and beer businesses, may now tend to view him as a has-been, if not a dead duck.

It is thanks to endless legal delays that Mallya is still keeping his head above water - though the water level is rising.

The Mallya case tells us exactly why India needs an efficient bankruptcy law - and why public sector banks need to be made autonomous from the government.

Just as the Bhushan Steel case showed, the fact is Mallya would not have been shown the kind of patience by banks if all his lenders had been autonomous - accountable to private investors and shareholders.

A strong bankruptcy law would not only have protected the banks, but also Mallya. If he had been forced into chapter 11 earlier, his dues would not have spiralled out of control. It was because he did not declare bankruptcy earlier that he is now in danger of losing his entire empire - unless he has pieces of it abroad that Indian law cannot reach.

We need a strong law to allow bankers (or a group of minority investors or the regulators) to appoint a new boss or independent directors in companies where public interest is at stake. It was because Mallya could not be sacked from Kingfisher early enough - sometime probably in 2010 - that the airline's pain dragged endlessly.

Regardless of whether their loans are good or likely to turn problematic, banks need to have the right to make a pre-emptive strike on management before the operations actually get into a tailspin. Once a company's operations start winding down, failure is self-propelling for credit starts drying up and the stock starts tanking. Change of management (even a temporary change) is needed to assure all lenders and shareholders that corrective steps are being taken and the operations of the company will not be affected. If the banks had moved in on Kingfisher Airlines before it went kaput, they could have taken an early hit and spared Mallya from having to become a bakra.

Bankers usually have a fair idea about how a company is faring based on account statements and audit reports - and their own understanding of how the industry itself is faring. But public sector banks, with their dilatory systems and lack of accountability, are likely to be more vulnerable to bribery and hanky-panky for the simple reason that bankers have short tenures and keep getting transferred. The system of rewards and penalties for performance and non-performance is weaker in public sector banks. This is why ICICI Bank could bail out of Kingfisher in mid-2012, but the public sector bakras are still left holding the sack.

Cronyism thrives primarily through its ability to influence bankers and regulators - of course, with help from politicians and bureaucrats. This calls for a clear separation of public sector banks' reporting structures from their administrative ministry (in this case, finance). RBI governor Raghuram Rajan said the other day that the government could put all bank shakes in a separate special purpose vehicle so that bankers were insulated from political pressures to lend.

In the case of government-owned institutions, you can't change the owner, but you can at least prevent the owner from damaging taxpayer assets.

Crony capitalism - if left unchecked - ultimately consumes both the crony and his capital. This is the moral of the Vijay Mallya story.

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