Companies & Sectors
King of hard times: What Kingfisher Airlines owes multiplies, as do its woes

Services disappear—no more ‘world class’ gourmet cuisine and dwindling on-flight facilities—as the carrier is finding it difficult to get on top of its mounting debt pile. How long will the carrier’s customer support keep the show going on?

Kingfisher Airlines has been known for its superb customer service. However, the airline seems to have cut down on some other on-flight services as it reels under a burgeoning debt. World class gourmet cuisine promised by Dr Vijay Mallya? Many of their flights now don’t carry non-vegetarian food—a gentle face intoning “May I offer you a vegetarian meal?”

Even the famed business class does not deliver what the menu promises. Behind-the-seat in-flight entertainment systems? They don’t function in many cases, probably because Kingfisher has stopped paying the TV channels. And many flights now don’t feature the business class—despite them not being budget flights belonging to the ‘Kingfisher Red’ category.

Currently, the company has a debt of Rs Rs6,200 crore, as Ravi Nedungadi, group president and CFO, Kingfisher Airlines, declared in a TV interview in May this year.

The company has been talking about debt restructuring since long to stall payments, but the exercise has cost 11 public banks Rs1.65 crore as the value of their equity holding in the company has undergone continuous erosion.

A major chunk of this debt consists of overstretched oil dues. Surprisingly, despite having defaulted consistently on this count, the company has managed to get repeated extensions from state-owned oil companies, which has amounted to a huge loss in revenue. The oil marketing companies grumble intermittently, but the matter is resettled soon after.

The latest instance of Kingfisher’s flights being grounded at New Delhi on 18th July proved to be another token interruption in the four-year old routing. Hindustan Petroleum (HPCL) refused to supply fuel unless Kingfisher cleared its outstanding dues, but the operations resumed after a while. Kingfisher has defaulted in payments to many fuel suppliers, airport authorities, banks and other entities on various issues, but manages to get credit extensions repeatedly.

Kingfisher Airlines refused to comment on the issue, and repeated phone calls to HPCL’s corporate office elicited no response.

On 18th July, Kingfisher Airline’s dues for Hindustan Petroleum (HPCL), the supplier of aviation turbine fuel (ATF), stood at a staggering Rs702.88 crore. Purchase receipts issued from SBI (State Bank of India), Axis Bank and UTI show that between 30th June and 18th July, Kingfisher’s ATF bill stood at Rs156 crore.

When HPCL put Kingfisher on the cash & carry model in June 2010, the credit limit on the bank guarantee was fixed at Rs300 crore. “Purchase orders have to be placed a day in advance. If the amount falls within the credit limit, it gets cleared immediately, but for dues exceeding the limit, it gets marked as ‘credit hold’. Only the topmost officials of HPCL can override that and extend the dues,” said HPCL’s former chief sales manager Ravi Srivastava.

This year, while closing its annual accounts, HPCL asked Kingfisher to clear the overdue amount. Kingfisher submitted a cheque of Rs200 crore, dated 31.3.2011, but it bounced on 4.4.2011. Mr Srivastava had also approached the CVC (Central Vigilance Commission) about this matter. After it showed on its website that the case was being investigated till May 2011, the watchdog abruptly declared that the case was closed in July 2010.

HPCL had issued many warnings earlier, which have been followed by ministry directives for payment of dues and then an unexplained extension. The oil ministry had directed HPCL to invoke United Breweries’ Rs250 crore corporate guarantee in March 2010 for recovering dues, but the issue was sidelined because the move entailed a tiresome legal process. After that, HPCL shifted to a bank guarantee.

Kingfisher used to get ATF from Indian Oil and Bharat Petroleum. The former invoked the bank guarantee in 2008, and BPCL dragged Kingfisher to court in 2009. But the parties went for an out-of-court settlement later, which entailed Kingfisher to pay Rs10 crore per month to the company.

Kingfisher is a defaulter on multiple counts. In 2009, Kingfisher settled an
out-of-court settlement with German MRO firm Lufthansa Technik of Lufthansa Group—a case on non-payment of dues for repair and maintenance jobs done on Kingfisher aircraft by the vendor. In May 2010, IDBI Bank recalled a Rs750 crore loan after Kingfisher failed to stick to its repayment schedule.

Kingfisher Airlines has never managed to make a profit since its launch in 2005. Apart from oil dues, Kingfisher also owes the Airports Authorities of India (AAI) an amount close to Rs200 crore. It was reported a few days ago that AAI was threatening to encash undated cheques worth Rs130 crore from Kingfisher unless the airline pays up its dues. It owes the Delhi and Hyderabad airports together some Rs 93crore, as Sidharth Kapur, CFO, GMR Airports, had said in a recent interview.

What remains impressive still is the quality of Kingfisher employees. Kingfisher may be burdened with debt. But you cannot make that out from the quality of customer service. Here is the recent experience of Moneylife’s Editor: (See Kingfisher’s Customer Support:

The customer-support is efficient, polite and ever helpful. Hope that, at least, lasts a long time.




6 years ago

Brazen loot again and again and again.....
No PIL against AIR India Loot?


6 years ago


Ravi Srivastava

6 years ago

brazen loot of public money by a Private Airline by infamous Vijay Mallya the Rajya Sabha MP anda defunct fraudster CVC

Mr P V Dhananjay

6 years ago

The above article on Kingfisher Airlines is excellent as it is based on facts and figures.When the airlines goes belly up, I pray that the well serving employees find suitable employment elsewhere. As far as Mr. Mallya is concerned, he will continue to have good times at the expense of Banks, oil companies et al !

Borkar MR

6 years ago

Sir, a correction 2 my comment posted just few mts back. Pl read instead of Strngguling Lufthansa "struggling Alitalia" Borkar.
Thanks n sorry 4 incon.

Borkar MR

6 years ago

Airline business is a difficult one. Last few months lot of people did bashing of Air India. Where all those r now? I am not here to plead of AI. It is the job of AI MGT n Unions to save its grace. I wud qte what in Brand equity ECOTIMES supplement has to say "strike prone BA, unimginative Lufthansa,struggling Lufthansa" (dte-20-7-11) i HOLD NOMINAL SHARES in
Kingfisher- Annual Report reaches me after the AGM date is over or just on that day. So u do not reach for it.
I have lot of stories about them. Having worked for airline 33 years n still having regular feed back from employees of Kingfisher/Jet - Technical persons working for them after their retirement from AI. At present how many airlines r in green? U have 2 count on ur fingers.


6 years ago

There is more to it than meets the eye.
The aviation minister Mr Praful Patel has intervened several times to induce the oil marketing companies to supply fuel to Kingfisher, in spite of heavy and long overdue amounts.
You cannot but agree with Mr Vikram when he writes aptly 'His(MALLYA'S) ability to show politicians and officials a good time keeps him out of trouble'.
That is the secret of flying high.
Vittal Mallya is more seen at all the glam events like F1,IPL,Fashion week,Derby day ETC.In one of the IPL matches he was so drunk that his red eyes were popping off its socket.
He is enjoying himself at the shareholders,banks and oil company cost.Where can he find time to manage these companies??
He is more engaged in manging the powers that be.
His worthy son Siddharth is not very far behind in having a good life.
God bless the poor shareholders


6 years ago

Mallya is living the high life at the cost of investors and banks. His ability to show politicians and officials a good time keeps him out of trouble. He will pay one day. He is living a fools dream.

ITC Q1 net rises 24.51% to Rs1,332.72 crore

Segment-wise, the FMCG business witnessed revenue growth of 17% to Rs4,071.32 crore, revenue from the hotel business stood at Rs230.46 crore while agri-business achieved a revenue of Rs1,701.14 crore during the quarter

New Delhi: Diversified business major ITC today posted a 24.51% increase in net profit to Rs1,332.72 crore for the quarter ended 30 June 2011 compared to Rs1,070.31 crore for the quarter ended 30 June 2010, reports PTI.

During the period under review, the company’s net sales surged by 19.56% to Rs5,767.47 crore from Rs4,823.59 crore in the corresponding quarter last fiscal.

Segment-wise, the firm’s FMCG business, which includes its cigarette, foods, personal care and other products, witnessed revenue growth of 17% to Rs4,071.32 crore during the reporting period.

Revenue from ITC’s hotel business stood at Rs230.46 crore while its agri-business achieved a revenue of Rs1,701.14 crore during the quarter.

Shares of ITC were trading at Rs 205.65 on the BSE, up by 2.42% from their previous close.


Governance of MFIs: Time to implement ‘connected lending’ provisions of RBI circular of 2007

Is it appropriate for a company, established to provide access to finance to low-income people, to lend to its promoter and managing director to buy shares in the same company at par value?

Consider yourself as an institutional/retail investor in a micro-lender and you may have bought equity because you believe that microfinance institutions (MFIs) provide access to finance for low-income people and enable them to have a better life. Alternatively, you could be a development finance institution (DFI)/bank that has provided a loan to an NBFC MFI as part of the priority sector obligations and/or other schemes. Or you could be a multi-lateral or bi-lateral institution that seeks to improve the lot of excluded and disadvantaged people in an emerging market through development of the private (financial) sector using institutions like NBFC MFIs. How would you react when you hear that one such NBFC MFI, where you have either invested your hard-earned money or lent priority sector funds, has, in turn, lent to its own founder managing director, a huge sum of money to buy shares in the same MFI and especially, at par value?

Unbelievable but true. Such a transaction did take place at a large Indian NBFC MFIi . The incident first came to light through Professor MS Sriram's paperii , in the Economic and Political Weekly (June 2010), which noted that an NBFC MFI had lent its founder and managing director, a sum of Rs1.636 crore to enable him to buy shares in the same company. From a perusal of the published financial statements of this NBFC MFI, it is clear that an interest-free loan of Rs1.636 crore, was granted by the MFI [which was supposedly predominantly owned by the poor clients through several Mutual Benefit Trusts (MBTs) and also had key institutions as shareholdersiii ] to its then managing director and promoter to buy shares at par value. (Read relevant table below, reproduced from the MFI's audited statements for the year ended March 2007.)

Now, you may wonder whether this is legally permissible from the standpoint of corporate governance. In fact, I had a similar question and did some research on the matter and found that there is a Reserve Bank of India (RBI) circular that talks about this aspect of (not) providing credit facilities to the directorsiv . Specifically, the RBI circular on corporate governance for NBFCs, dated May 2007, notes that,

"In order to obviate conflict of interest in the lending operations of the NBFC, it should not grant any loan, advance or non-fund based facility or any other financial accommodation/facility to: (a) its directors or their relatives; (b) to any firm in which any of its directors is interested as partner, manager, employee or guarantor; (c) any individual in respect of whom any of its directors is a guarantor; (d) any company of which, or the subsidiary or the holding company of which, any of the directors of the NBFC is a director, managing agent, manager, employee or guarantor, or any firm in which he holds substantial interest; and (d) any entity, whether incorporated or not, which uses as a part of its name or in connection with its business, the name of the NBFC or any such word as would show its association with the NBFC."

Likewise, further research led me to believe that the spirit of the Companies Act, 1956 typically prohibits companies from directly buying its own shares and/or indirectly financing its directors to buy the same. In the present case, it must be noted that, the loan grantedv interest-free to the promoter managing director was towards purchase of shares in the same company.


My views apart, as I got deeper into the legal aspects, I got to know a very interesting aspect that the provisions relating to connected lending in the aforementioned RBI circular have been in abeyancevi since 11 July 2007. Likewise, it appears that the concerned MFI also publicly stated (prior to its IPO) that there was nothing illegal in what it had done (in so far as the connected lending was concerned) and further that the provisions of the Companies Act did not apply to private limited companies, which is what the NBFC MFI was when the said (connected lending) transaction took place.

Therefore, it seems prudent to conclude that as per the prevailing lawsvii , the connected lending that occurred at the NBFC MFI may not have been strictly illegal. However, I am not sure whether it is appropriate for a company-established, in the first place, to provide access to finance to low-income and vulnerable people, registered as an NBFC with RBI and using public deposits (by way of accessing priority sector bank loans)-to lend to its promoter and managing director to enable him to buy shares in the same company at par value, without being seen as a "misgoverned" company. This is something that all of us need to take a call on.

In my humble opinion, granting of such a huge interest-free loan to a director in a financial services company that is owned in majority by the poor clients in MBTs and DFIs (together, the MBTs and DFIs held 54% of the shares of the company then), and meant to service these poor clients in the first place, is not at all appropriate from a corporate governance perspective. Without question, this action of providing the loan to a director was certainly not, under any circumstance, in the interest of these shareholders, especially the minority (individual MBTs and/or individual women) shareholders. One can certainly make the argument that such a thing may not have happened if there had been someone on the NBFC's board protecting the interest of the (minority) shareholders. I am sure that whether an institutional/retail investor or a DFI/bank or a multi/bi-lateral agency, you will certainly not approve of such connected lending transactions as examples of good practices in corporate governance. {break}
Now, that is certainly an issue that the RBI, SEBI and Ministry of Company Affairsviii need to seriously ask and answer, and thereafter, amend the relevant circulars/laws accordingly. Some of the key questions that these regulators would need to ask and learn from are mentioned here.

(a) Was this connected lending by the NBFC MFI to the promoter (also the then managing director) to enable him to buy shares in the same company, a correct practice from a legal perspective? Given that the company was/is a financial institution registered under the Companies Act, 1956 and the RBI NBFC regulations with the primary purpose of lending to low-income people, how does this practice of connected lending to the promoter managing director relate to extant regulations and norms, both in letter and spirit?

(b) Was this correct practice from a shareholder perspective, given that the company was originally established to provide loans to low-income people and there were significant development funds in the company, and as at the time of granting the loan about 54% of the company was together owned by the MBTsix and DFIs?

(c) On what basis did the NBFC authorise this lending to the then promoter managing director? What were the independent and institutional nominee directors doing, even as the board approved this connected lending transaction?

(d) What was the source of funds from which this loan was made to the promoter managing director? This needs to be transparently understood in terms of whether so-called 'priority sector funds' and/or 'soft development funding' was used for providing the loan to the promoter managing director.

(e) Are not the consequent increases in capital and the associated leverage (without any change in the true financial condition of the NBFC)-serious misstatements of the financial condition, in the absolute sense of the word? Irrespective of the quantum of misstatements, is not the practice questionable, from a corporate governancex perspective?

(f) Ceteris paribus, is this connected lending a correct practice of corporate governance, especially in a financial institution?

The issues here  are especially serious because the company is now a listed NBFC MFI and much of the problems related to the 'perverse incentives' in Indian microfinance (to quote Vijay Mahajan's often mentioned phrase) could perhaps have been avoided, had only the instruction contained in the RBI circular been fully implemented on the ground, way back then.

Further, to the best of my knowledge, the various clauses in this well-intentioned RBI circular on corporate governance for NBFCs, and especially those relating to matters of connected lendingxi , have not yet been implemented as on datexii .

Without any doubt, the time is now ripe for all these provisions of the RBI circular to be fully implemented without any further delay so that such occurrences can be prevented forthwith! And last but not the least, I do hope that the Union Ministry of Finance, which is in the process of finalising a bill on microfinance, addresses these critical issues to ensure the orderly development of a vibrant microfinance industry in India that is really for the poor, in every sense of the word.

i The name of the company has been withheld as the idea is not to embarrass a particular MFI, but it can be provided if required!
ii Commercialisation of Microfinance in India: A Discussion of the Emperor's Apparel by Professor MS Sriram, (Economic and Political Weekly, 12 June 2010, Vol XLV No. 24, Page 70).
iii Development Finance Institutions
iv RBI Guidelines on Corporate Governance 2007, kept in abeyance for some reason. The guidelines were not to be practiced until further notice from the RBI.
v It must also be noted that the loan amount was much greater than the total of six months of his (then listed) salary and apparently, this interest-free loan was also not administered through a trust. Likewise, it seems that the shares were also not issued in the name of the trust.
vi In fact, the circular on Corporate Governance (dated 11 July 2007) on the RBI site still contains the following with regard to 'connected lending': "The Bank has received suggestions in the matter with reference to paragraph 2 (vi) of the circular dated 28 May 2007 containing instructions on connected lending. The suggestions are being studied and the instructions contained in paragraph 2 (vi) of the said circular will become operational after final evaluation of the suggestions and modifications, if any considered necessary."
vii The concerned MFI has all along maintained that these provisions of the Companies's Act did not apply to private limited companies, which is what the MFI was in 2006-7.
viii I am not trying to find fault with any stakeholder or the regulators, but rather I am merely highlighting an existing loophole that can perhaps be still misused. I recognise the tough task of implementing regulations and certainly do not wish to undermine the excellent work done by regulators (in many cases and instances) and this is indeed appreciated. At the same time, we also need to continuously learn from crisis and ensure that laws are indeed changed to suit ground level realities.
ix Despite the MBTs holding 47% of the shares, they appear to be weak shareholders and /or minority shareholders.
x It must be mentioned that all things begin small and eventually snowball.

(The writer has over two decades of grassroots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural/urban development and urban poverty alleviation/governance. He has worked extensively in Asia, Africa, North America and Europe with a wide range of stakeholders, from the private sector and academia to governments.) 


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