In Defence of Vijay Mallya

Let’s leave our inner Arnab Goswami at the door and try and think – what is so unique about Vijay Mallya’s case that the banks with generous support from the media have converted Mallya into a poster child for over-leveraged businesses and their eventual descent into non-performing assets?

Certain facts are admitted:-

  • A 17-bank consortium led by SBI lent money to Kingfisher Airlines, a public limited company in which Mallya was a promoter-shareholder.
  • The amount owed by Kingfisher Airlines to the banks is about Rs. 9,000 crores.
  • Mallya has given a personal guarantee for certain parts of the aforesaid debt. Most reporting suggests about Rs. 1500 crores is the personal guarantee.
  • Mallya has always had a penchant for luxury.

There is really no point in discussing the concept of the corporate veil and limited liability except to say that unless fraudulent conduct (the Ramalinga Raju kind) is proved the veil ought not to be pierced and there is no reason to go behind the company. Also some conspiracy theorists have already started alleging corruption and political pressures facilitating loans. If proved, yes it affects the case. But the pivot rests on “if proved”.

In a recent statement Mallya claimed that banks have received an aggregate of Rs. 1,244 crores from various sales of assets. Another Rs. 1,250 crores is deposited with the Karnataka High Court. I am inclined to believe the statement because I haven’t seen one bank rebut this. Also why make a brazen statement when you know every two-bit journalist is out looking for an ‘exposé’. So about 28% of the debt is backed by assets even today.

Now lets take SBI’s case. It is widely being reported that SBI is owed Rs.1,623 crores of which it has already recovered Rs. 155 crores. Further it turns out Mallya had guaranteed another portion of the debt with his Goa Villa which until a few years ago was the place to be for anybody who was anybody. SBI can sell it and recover whatever is the going rate of real estate.

That leaves the question of SBI’s hypothecation over certain trademarks of Kingfisher Airlines which are valued at about Rs. 6 crores. Quite literally peanuts. But that is the value today! If hindsight is with what we saw commercial decisions, then there would be no depressions ever! Lehmann Brothers would not have gone under and Donald Trump would never have filed for bankruptcy. At the time the money was given to Kingfisher Airlines, the trademarks in question were valued at Rs. 4,111 crores. Was the valuation correct? I doubt it. But I also doubt the valuation of the Flipkart ilk. If SBI did not do its due diligence, then we should be plastering the picture of SBI’s then management on TV and not Mallya’s. Which individual does not overvalue their property? The same logic obviously applies to banks other than SBI as well.

Turning to the question of personal guarantees. The law in India does not allow a summary attachment of the assets of the guarantor. A process has to be followed, a court order secured, and eventual attachment takes place. It is reported all around that proceedings are pending before various DRT’s. Will this take time? Yes. Is that Mallya’s fault? No. Is the system biased against banks and recovery? Not really. Banks can and have gotten court orders against Mallya using the assets which form the basis for his personal guarantee. Truth shall out and the assets will be sold if the banks make out their case.

Defaults of his company don’t become his merely because he owns an IPL team or because he likes to get pictures clicked with women in bikinis. We need to assess the problem of corporate debt independent of the personality of the promoter. A satvik-teetotaler-virgin industrialist is no guarantee for corporate success. Various Indian companies are grossly over-leveraged. Caravan’s story on Essar comes to mind [Doing the Needful]. Not to mention various lesser-name companies such as Bhushan Steel and Winsome Diamonds. Lack of deep corporate bond market in India does not help and Mr. Jaitley’s proposal to develop the market further in his budget proposals is a step in the right direction.

So why have this hoopla where we have declared a person an absconder when the truth (subject to correction) remains that till date no court of law has declared Mallya an absconder? Recovery will happen when it happens. And more often than not it does not happen. But that is the name of the leveraged corporate lending game. Big returns, big risks.

 

* Citations have been omitted because all the information cited above has been reported in the newspapers in the past week.

** Happy to read rebuttals to the above position.

 

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