The Curious Case of Vijay Mallya and his bailout. And one more scam!
How did he pull it off? Read on
For this you, have to go back to 2010. As usual Mr Mallya was neck deep in trouble, with the banks circling around like vultures asking for the money that Kingfisher borrowed but could not or did not repay. So our man, decided to sit with the bankers, to ‘restructure’/reduce/waive off his debt. And the bankers obliged.
Kingfisher’s debt was reduced to Rs 6000 Crores,(type ‘debt recast’ in the find box) from the previous debt of Rs 8414 crores, when some of the debt was converted to equity. Banks took up a 23 percent stake in the Airline, with each Kingfisher Airline share being valued by the banks at Rs 64.48. The banks determined that 23 percent of the airline, at the above share price, was about Rs 1400 crores. This price was knocked off from the original debt. After that, both the bankers and Mallya went home happy and probably had a big party.
According to banks, 1400 crores of Kingfisher Airlines, represents 23.32 percent of the company when valued at Rs 64.48 per share. In reality however, a simple multiplication shows that, 23 percent of the company at that value is closer to around Rs 1000 crores, with the 400 crores being touted as the haircut taken by the banks. So the banks, which are under the control of the government of India, literally wrote off Rs 400 Crores, even after their generous calculation.
But, when you account for the real stock price at that time, which was Rs 39.90, 23 percent of the company was not Rs 1400 crores or Rs 1000 crores as determined by the banks.
It was, actually, somewhere close to Rs 461 Crores. The day the deal was signed, banks had decided to literally hand over Rs 1000 crores of depositor’s money to Vijay Mallya and his floundering airline. While Vijay Mallya claimed he had reduced his debt, which in essence was true, he had actually deprived the depositors and the banks of more than Rs 1000 crores.
The banks, to their defence, will say that as it is the price of a share and considering India’s potential in aviation, Rs 39 is a minor blip and the price will rise to its true value, which they determined as Rs 64, sooner rather than later.
It has been eight months since the deal was announced, and the highest stock price of Kingfisher in that period…Rs 48.85. Not once did it cross, the bank determined value. Not once.
As of today Kingfisher stock price has nosedived to Rs 23, rendering the value of the Kingfisher stocks that the banks have, to Rs 276 crores or so.
Vijay Mallya has swallowed, as of 21-Nov-2011, at least Rs 1200 crores of depositor’s money from various banks. .
And Vijay Mallya says, he has not taken and will never take tax-payers money.
However the fundamental question is, didn’t the banks realize that this is an almost insolvent if not a totally insolvent company they are dealing with? The facts were on the table, here was a company that has not made a profit since the day it was established. It has substantial unpaid bills in almost every sphere of its operations. Its debt was rising every day. And the global outlook on the aviation sector in general has been negative for the last few years.
So how could the bankers not only give Kingfisher Airlines a breather in its debts, but give it at an unheard of 60 percent premium guarenteed to cause them huge losses in both short and long term? Didn’t they realize it was not their ‘baap ka maal’ they were playing with?
At this point I can only speculate, but I am sure the decision was not Bank’s alone. I guess some higher power had to do with their largeasse.
I can only point you in the general direction of the man. He is a politician and before joining Indian politics, made his living by manufacturing Beedis. He is in fact India’s largest beedi maker, by a distance.
Beedi’s are the considered the AK-47′s of the tobacco world. Though everyone assumes nuclear missiles are the weapons of mass destruction, it is the humble AK -47 assault rifle that is the real WMD. It is inconspicuous, easily available, very cheap and has killed more people in more countries than nuclear weapons ever can.
Similarly, a beedi is ten times cheaper, and going by the World Health Organization and Voluntary Health Association of India, it is smoked by eight times as many people who smoke cigarettes. Also according to them, the deaths caused due to beedis are more than the deaths caused due to the other tobacco products combined.
But when in 2010, Health Ministry decided to put pictorial warnings on tobacco products to warn people of their dangers, Beedi’s were miraculously exempted from necessary rule.
You don’t need to guess why that happened.
But what has this got to do with Vijay Mallya? Well turns out a lot
When Vijay Mallya’s Kingfisher Airlines flew its first flight on 9th May 2005, Kingfisher was ranked at number six in the pantheon of Indian Aviation, while Indian Airlines was in the second position, with Jet Airways at number one. Instead of concentrating on making his airline better, Mallya decided to push others out of the way in his quest for glory.
And he had a lot of help in doing that.
First obstacle, Capt C.R Gopinath, pioneer of low cost aviation and e-commerce in India and the guy responsible for the maximum number of first time fliers in India. Formidable force.
Ensure that
1. He does not get landing space and hangar facilities in major airports.
2. Further permits to fly on profitable routes are denied.
All on orders from his guardian angel.
For added effect, Mallya unleashed a media barrage, targeting his airline labelling it a ”Flying Udupi Restaurant’ even when Air Deccan was making more money and carrying more passengers than Kingfisher.
Capt Gopinath saw the writing on the wall and sold out to Vijay Mallya.
Obstacle 1, obliterated.
While this was happening, Subroto Roy Sahara, owner of Air Sahara, then the fourth largest operator also wanted to sell out. So, Vijay Mallya got into a bidding war for that heavily loss making and debt ridden airline, and using the Parthiban-Vadivelu auction strategy inflated the price for his competitor, the no 1 airline at that time. They fell for it and bought the airline at a price unanimously considered as too much.
Obstacle 2 dispatched, or that is what he thought.
And what happened to Vijay Mallya and Subroto Roy Sahara
However the most difficult competitor still remained Indian Airlines and Air India.
In 2007, Indian Airlines had a pittance of a loss of Rs 280 Crores. I say pittance because at the same time Mallya was seeing losses of Rs 480 Crores or so. And also, Indian Airlines had achieved profitability of over 90 percent of its routes and remaining 10 percent of the routes were on its way to green. So it was well on its way towards overall profitability. And Air India, was a actually a profitable airline.
And then the intervention happened
Completely disregarding the existing systems, policies and patterns of both the airlines, the powers that be, decided to merge IA and AI, ostensibly to increase their efficiency and allow it to enter the global Star Alliance. This according to them was the panacea for the non-existent ills of the national carriers. Why Star alliance only and why couldn’t Indian Airlines and Air India be members of that damned alliance on their own terms were trivialities that were not answered.
So suddenly, one loss making airline on its way to profitability and one just about profitable airline suddenly became one huge loss making airline. And this in spite of vehement opposition from the management of both the constituent airlines.
And to deliver the coup-de-grace to the shaken airline, the powers ordered a MIND BOGGLING 111 AIRCRAFT IN ONE GO. Yes a total of 111, that too at a mind boggling cost of Rs 32,000 crores. For apparently enhancing its operational capability.
This when the management of Air India and Indian Airlines, the ultimate end users of the aircraft, had requested a sum total of 67 aircraft.
The inevitable had to happen. When your annual turnover is about Rs 7000 crore, how do you pay for aircraft worth Rs 32,000 Crores? You take a big loan, for which there is a big interest, Rs 6000 crore a year big.
What started as a loss of Rs 180 crore with a negligible debt, the new company suddenly had debts worth Rs 40,000 crores for which interest was mounting every day.
Main competitor taken care of.
It did not stop with that. Indian Airlines had specifically requested for Airbus A 340 planes, which were wide bodied and had a reliable delivery schedule. This was specifically mentioned in their requestion for new aircraft.
‘Indian Airlines, need 43 A 340-300 aircraft for their operations’ was the statement by their management. Unfortunately the statement was so unclear and complicated, that the powers to be just
And without any prior intimation or consultation, straight up changed the Request for Proposal (RFP).
So, the original requirement mandated that the new aircraft should seat six abreast which rendered both Boeing and Airbus eligible. This inexplicably was tweaked, with the new guidelines mandating the aircraft to seat nine abreast. As a result, Airbus was ruled out and Boeing suddenly was the only one in the race.
Also perhaps, in the RFP was a clause, that the aircraft should take as much time as possible for delivery. For the date on which I am writing, not one of the new aircraft from Boeing has been delivered, three years since the planes were ordered. All this while the debt incurred to buy them keeps accumulating day after day for Air India.
Air India was not being killed. It was being simultaneously poisoned, strangulated and stabbed. What more could one do to kill, what was once considered the national pride?
Turns out, a lot more.
The powers now started meddling with Air India’s routes, to explicitly benefit Mallya and Kingfisher.
What the hastily arranged merger of the airlines, achieved was it had a direct effect on the agreements that the Indian Government has with foreign countries. For example, the agreement with Singapore allows a maximum of two Indian Carriers to fly at most 32 flights. The roles were being fulfilled by Air India and Indian Airlines, each flying 16 routes at about 90 percent capacity.
With both of them now being merged as one, it suddenly became one airline, opening the space for another airline to start flying to Singapore. And to enable that airline, the powers cut down 16 routes of the 32 flown by national carriers, so that the new airline join this highly profitable routes party immediately. You don’t need to be Einstein to figure out who filled in. In all, 16 profitable routes were lost to Kingfisher.
And while Air India continued to fly to Singapore, some domestic routes of Air India were cancelled outright, without as much as an explanation apart from ‘we need to cut loss making routes’ rigmarole.. And mind you, many of these routes had over 90 percent occupancies.
And exactly one week after these ‘loss making’ routes were cancelled, Kingfisher started operations on the same freaking routes.
Like the Mumbai-Vadodara: 90 percent load factor. Cancelled by Air India, patronized by Kingfisher
Kolkata- Bangkok- 90 percent load factor. Cancelled by Air India, Patronized again by Kingfisher
And also why does Air India, most of the times, have the most expensive tickets for peak flight timings,
Like here, here, here and here as well.
So to summarize
Excess Aircraft: Loss of Public money
Unnecessary Debt and resultant interest: Loss of Public money
Loss of Revenue because of arbitrary route cancellations and excessive pricing: Loss of Public money
All this was done to favour Mallya.
And Mallya claims he has not touched a paisa from the public.
In fact at the Air India inquisition, this was what a ruling cabinet minister had to say and I quote.“Reasons for going ahead with huge purchases by the civil aviation ministry despite Air India and Indian Airlines not having the capacity to support it, remain unknown to the Committee. It, therefore, recommends that this aspect needs to be further probed to fix the responsibility for taking such an ambitious decision that has become a big financial liability.”
When the Congress government starts pointing at you for corruption, you must have done something wrong.
It was Vijay Mallya’s strategy to drive everybody else to the ground, so that he could have a monopoly over air transport in India. And he had a faithful and willing ally at the peak of the aviation power pyramid, who did his bidding. It was as if, there was a grand plan to drive Air India to the ground, put it up for distress sale so that the leading bid could come from. You guessed it, Vijay Mallya.
What they did not account for was Mallya going belly up before that happens.
The systematic destruction of Air India and the Kingfisher bailout, should not be viewed in isolation. Both are closely related to each other. Mallya entered aviation, knowing fully well he had his friends in the seat of power. While they meddled with the Air India so that Mallya benefits, he grossly mis-managed his airline knowing fully well, come what may, he will somehow be saved in the end. With the Government ‘considering’ the bail out/loan/capital infusion application of Kingfisher, he might well be vindicated in his belief.
Whatever way Mallya would like to dress it, if given, it will be a bailout. For the simple reason that, there is no way, under normal circumstances in the financial universe that the banks will lend money to a company in a state that Kingfisher is in. Everything that Kingfisher is today flies in the face of conventional lending norms. In fact it ticks all the boxes that a bank will check, for going as far away from the company as possible
Huge existing debt : Check
Weak outlook for the entire industry: Check
No significant assets: Double Check
Consistent losses: Triple Check
Truth be told, Mallya does not need a bail out. It will be a travesty if he is ever given one. Forget a bail out, all his debts should now be recovered on a priority basis, lest he pulls a Houdini and runs off somewhere. If he cannot pay, which I am sure he cannot, the government has to
1. Sell every asset of Kingfisher, or whatever is left (Whatever it has in terms of landing rights, Parking spaces etc etc)
if that does not suffice
2. They should confiscate his expensive collection of vintage cars
and if that does not suffice
3. Sell off his prime properties that he owns in UB City in Bangalore.
If that happens, no other tycoon will then take the Indian public or the government for granted and dare to mismanage their business with the belief that the government, with some inside help, will bail them out.
As of today, the total debt of Kingfisher, including pending fuel bills, landing charges, lease rentals totals to around Rs 10,000 crore and its total Market Capitalization is around Rs 1,220 crores.
Kingfisher’s debt, today is approximately 1000 percent of Kingfisher’s market capitalization. Which means, Even If I sell, all of Kingfisher’s shares, I will still have to about Rs 9000 crores of its debt left to be reclaimed.
9000 Crores
Do the banks still think Kingfisher will get their money back?
I will go on a cruise liner, sharing the president’s suite with Scarlett Johansson and Jessica Alba before that happens.
1. The weakening of Air India, also benefited other private airlines and some foreign carriers. No word is said about them because they did not go to the government with a begging bowl.
2. The financial calculations are approximate.
For some fascinating insights on the Air India scam, i redirect you to this amazingly informative piece.
Updated on 04 February 2011:
As one eagle eyed reader pointed out, the article originally stated that Kingfisher’s market capitalization was 12000 crores, which was wrong. The market capitalization is actually 1200 Crores.
The error happened as a result of a mistake in the conversion from American billions to Indian crores. I am really sorry for the mistake. The correction has been made and the article amended to reflect the same.
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