Companies & Sectors
Kingfisher: Banking imprudence, crony capitalism, failed regulation & poor corporate governance

While the civil aviation ministry has destroyed Air India, bankrupt Kingfisher which is siphoning away the state-owned carrier’s passengers, is being supported by taxpayers’ money !

The saga of Kingfisher Airlines’ financial problems and its potential bailout exposes ugliest face of Indian business—crony capitalism, breakdown in corporate governance, poor regulation, banking impurdence and complete lack of accountability at all levels. Ironically, it is happening at a time whey Dr Veerappa Moily, minister for corporate affairs made an impassioned speech in Mumbai urging corporate India to have better governance standards, talked about protecting investors and spoke of instituting patriotism awards for Indian companies.

The Kingfisher story, clearly anticipated and documented by Veritas, a Canadian research firm, in September 2011 has played out as anticipated by this hard hitting report. The report titled, ‘A Pie in the Sky’ wrote: UB Holdings (‘UB’ or the ‘Company’), the parent of Kingfisher Airlines (‘KAIR’ or ‘Kingfisher’), is teetering on the verge of bankruptcy, and incidentally, so is KAIR. It also says that the true state of affairs are not reflected in the share price of the company and warned, right then, that investors should “sell the stock and salvage whatever value they can” out of it. Unfortunately, under pressure from our government, Indian bankers were in no position to do the same. Veritas also examines the state of the parent UB Holdings, in a report whose title says it all: “Debt Recast: Deadman Walking …” but more about that later.

What can be a more forthright description of the state of affairs than this? Veritas writes: “We believe that KAIR’s book equity has been wiped out although audited financials pretend otherwise. The airline is burning cash at a rapid rate, we estimate Rs301.10 core ($ 65 million) in the first quarter of 2011-12, is in a business that requires capital perpetually, has no pricing power given six carriers fighting over the major hubs in India, is dependent on the vagaries of the price of oil and the largesse of state-run financial institutions in India, and its parent UB has run out of financial room to accommodate the needs of this capital-starved child.

Moreover, in spite of the so-called debt recast, we believe that once the non-cancelable operating and financing lease commitments of KAIR are included, KAIR’s enterprise value is less than its contractually required cash obligations, implying negative residual equity value for KAIR, as illustrated in Figure 1. (All USD amounts @1USD = Rs46.45, 9th September 2011).”

Despite this situation, in the past five months, banks have done nothing to prevent Vijay Mallya continuing to burn cash as this rate, even to protect their own and ultimately taxpayers’ money. So bad are Kingfisher Airlines’ finances that they will drag down its parent United Breweries, too. But that is if Dr Mallya is ever made to pay and if banks are not forced to swallow his losses. Veritas says: “UB, which has marketable assets of Rs4713.40 crore ($ 1,037 million), compared to guarantees provided on behalf of KAIR of Rs16,853 crore ($ 3,638 million), is also staring into a black hole. We believe that the ill-conceived foray into the airline business has already cost UB shareholders dearly, and that their ownership of India’s premier liquor and beer assets has been sacrificed at the altar of egoistic ambitions.

More importantly, we believe that unless the banking institutions have provisioned judiciously for the debt provided to KAIR—approximately Rs4567 crore ($ 986 million) in loans to Kingfisher in addition to standby letters of credit, etc—it renders the disclosed capital position of the banks unreliable.”

At this stage, a comparison with how the government has behaved with the national carrier Air India is inevitable. Veritas calls calls the “civil aviation ministry involving Air India—the state owned carrier—to pull its act together duplicitous”. It adds: “Our view stems from the fact that it could be on the diktat of the regulatory authorities involving various ministries of the Government of India that an unviable airline, KAIR, which is competing against the incumbent state carrier and siphoning away its passengers on both the domestic and international routes, is being supported via taxpayer-funded financial institutions.

It is not only the financial institutions that are suffering. As per the fiscal 2010-11 auditors report, KAIR was also in default of the dues owed on behalf of its employees to regulatory authorities, which it doesn’t count as debt. As per the auditors of Kingfisher, “Undisputed amounts payable in respect of employees state insurance of Rs0.75 lakh ($ 1,619), provident fund of Rs43.80 lakh ($ 94,564), tax deducted at source of Rs422.98 crore($ 93 million), service tax of Rs10.48 crore ($ 2.3 million), professional tax of Rs2.46 lakh ($ 5,412) (In all cases relating to the years 2008-09, 2009- 2010 and 2010 - 2011) and fringe benefit tax of Rs 4.51 crore ($ 1 million) (balance of tax and interest for the financial year 2008-09). The due dates for these amounts are as per respective statutes.

Clearly, KAIR is funding itself at the expense of its employees and the Indian exchequer, to which it owed tax deducted at source on behalf of its employees of Rs42.29 crore ($ 93 million) as per the 2010-11 auditors report”.

If all these facts were available to a Candian company, why was the civil aviation ministry and the tax authorities so soft on Kingfisher? Here is how blunt Veritas is about the UB group: “We also believe that the current management of UB has lost all legitimacy to run the vast liquor and beer business, and that the financial institutions should auction the collateral to the highest bidder and recoup whatever is left for their respective shareholders”.

Now here is what Veritas says about “Deadman Walking” —the dubious debt recast that is being fed to us, a gullible public. It says, “In our view, the debt restructuring touted by KAIR is nothing to write home about. We believe that non-performing    loans    have    been rechristened/repackaged into subordinated debt, and that Kingfisher has defaulted on its obligations is unquestionable. We do not believe that KAIR’s antics would have found any takers in a responsible credit market and that the airline would have been liquidated by now.
During 2009-10, Kingfisher defaulted in principal repayment of Rs203.10 crore ($ 45 million) and overdue interest of Rs 81.6 crore ($ 18 million), for a total default of Rs284.7 crore ($ 63 million). Between July 2010 and March 2011, KAIR defaulted on interest payments of Rs349.80 crore ($ 77 million). Foregone principal repayments are undisclosed. Therefore, from the beginning of FY09-10 to the end of FY10-11, the airline defaulted on dues of at least Rs634.50 crore ($ 140 crore) to the financial institutions. (Data for the period April-June 2010 is unavailable.)

Clearly, the loans given by the banks to KAIR are impaired and therefore under the pretext of a debt recast, the banks have converted some of these unpaid principal and interest amounts into cumulative convertible preferred shares {Rs755 crore ($ 166 million) of term loans converted into CCPS of 7.5%} and cumulatively redeemable preferred shares {Rs553 crore ($ 122 million) of term loans converted into CRPS of 8% with a maturity of 12 years}.”

Veritas says that Kingfisher treats its auditors with disdain. Specifically, it says, “That management of KAIR is treating its auditors with contempt, and is off-side Indian accounting standards, is clearly evidenced by the following quote from its FY09-10 auditors report”. Well, Dr Moily, over to you now. What will you say to the gaggle of chartered accountants and company secretaries who applauded you this morning about corporate governance standards of one of our most high profile companies? That too one that is run by your colleague in parliament, Dr Vijay Mallya? Will you demonstrate to patriotic Indians that you will act to protect taxpayers’ money?

Veritas had earlier written a damning report on two Reliance companies, where it alleged that Reliance Industries and Reliance Communications (RCom) have short-changed investors by over Rs25,000 crore at RCom and that profits have been inflated at RCom between 2006-2010 by almost Rs11,000 crore. We had reported on this earlier (http://www.moneylife.in/article/reliance-communications-dubbed-poster-child-of-everything-wrong-with-corporate-india/18258.html.

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COMMENTS

rajeshpai

4 years ago

High time the KFA is allowed to fold up.And the promoter is till arrogant!!The great Dr, Yes Dr Vijay Mallya says all is well and now that FDI in aviation is on, investors are queing up to invest in his airline.He is not worried if his staff are not paid, taxes that he collected upfront from customers are not credited to the government account, banks are not paid as long as he is having a good time.
And he wants to be paid commission in cash to give his personal guarantee to the company he owns.What a cozy arrangement.

P M Ravindran

5 years ago

Should I laugh or cry? Is it sarcasm or genuine desire, that is expecting Veerappa Moily to act on behalf of the tax payers and in their best interests? I shall cut short my comment by reiterating just one fact that Moily is an Indian Politician!

Shibaji Dash

5 years ago

Sorry. Pl. read TOI in place of Eco. Times in my post 56 minutes ago.

prviswanathan

5 years ago

Yes.God finds the weight of GOLD Kireetam very heavy since looters forces over HIM.Let the public,beurocracy,government,Auditors take morcha to the god for upliftment.
carrier carried away.subhash.Curruption, thy name is wealth.

Shibaji Dash

5 years ago

Eco. Times & Business Standard ( Kolkata edn.) of 2day Feb. 23rd carries the front page news that KF will not be bailed out.Only Moneylife Team will have the clue. If these eco. dailies are correct, then was it a preventive alert at par with preventive vgilance? Only Moneylife Team will have the clue.

sibichen

5 years ago

It is time corporates realize the need for good corporate governance. All these corporate failures are because of audit failure. Please see http://sibi-cyberdiary.blogspot.in/2012/...

REPLY

dayananda kamath k

In Reply to sibichen 5 years ago

regarding corporate governance we have a corporate affairs ministry. one of the undersecretary there does not understand or pretends notunderstands english. i have made a complaint about a satyam in one of the nationalised banks . but he has treated same as claim from investor education fund. he had the audacity to send the same reply again.when i brought this to his notice in reply. i have refered this to the then corporate affairs minister sri salman khurshid and asked hime to recover all the salaries paid to him so far because he could not read and understand is being put in such a high post in such a vital department. nor response even it was brought to the notice of sri veerappa moily present incumbent but no action so far.

dayananda kamath k

5 years ago

it is not only the king fisher even the bnks regulator rbi and govt of india finance ministery also are not bothered about auditors as long as they give favourable reports so that public money can be shiffoned with impunity. only when the amount become so hug that it can not be concealed every authority tries to showcase how strong they are by jumping on the hapless people who are earlier protected by them knowingly. even the chartered accountnats instute of india is also behaves in the same way. i have a complaint with them for last 6 years against entire community of bank auditors for their failure to do their basic duties. and with the president of india as to how every financial regulating authority has failed in their constitutional duty for which they are created but no action till date. dupedbrogh

Ravindra

5 years ago

Another Satyam. It must also be investigated what the Director Finance was doing all this time and whether the Auditors have done their job properly.

Arvind

5 years ago

The risk of accepting corruption as part of social fibre is that this sort of stuff increases till society wakes up and begins to cleanse itself.

Here is another story on this issue that may be worth looking at - http://kaipullai.com/2011/11/28/the-curi...

Shibaji Dash

5 years ago

Sorry, could not end on the right note. It will hence be unethical and grossly misleading to run its advertisement : :"SBI The Banker To The Nation".

Shibaji Dash

5 years ago

Here is a govt. that casts aspersions on the Chief Justice without strengthening the tax law since 2003 when the Azadi Bachao Andolan case was decided involving the same issues as in the Vodafone case in 2012.Here is a Govt that also launches frontal assault on the Chief Election Commissioner.Here is a Govt that donates 1500 crores to a one-man company ( read proprietary concern) that is bankrupt beyond redemption. SBI will finally get net amount of only 1500 crores out of the capital infusion of 3000 ctores when it comes soon. Remember Mallya telling the journalists in front of North Block a few days ago that he met the Minister to discuss fertiliser subsidy ? Mallya's black humour had fallen flat on almost everybody.Now but it is all out in open.

Shivkumar

5 years ago

Try to get a loan of Rs. 1 Crore and see how the bankers will make you go in circles, but ask for Rs.1000 Crores, Bank Chairman himself will come and meet you. Just manage the guy.

G Ravishankar

5 years ago

Comprehensive analysis...unfortunately the Media Barons and biggest newspapers are not following Moneylife's no-nonsense approach. In the morning, we read the "sermons of the CFO" of UB featured on Page 1 !! Possibly that is what you can get from a paper priced at invitation price of Rs.2/-. !!

REPLY

Ravindra

In Reply to G Ravishankar 5 years ago

When it comes to Advertising Income the guns of the loudmouth media (most of them) fall silent. That is why you find the media full of corruption stories of individuals where there is no Advertising Income to media but silent at most Corporate mismanagement/corruption where the corporates dole out advertising income to media (with few honorable exceptions like Moneylife Foundation.

Natabar Dey

5 years ago

This is what exactly what one of your readers commented in this site on a related article only yesterday! Without the collusion of the bureaucracy and the govt. as a whole, this situation could never have been there.

ICICI Prudential Lakshya fund—A bit too risky for planning your goals

Another goal-oriented fund of funds scheme. The scheme suggests too much risk for short term goals

More and more companies are coming out with what is called “life cycle funds”. Recently, Axis Mutual Fund filed its offer document with the Securities and Exchange Board of India (SEBI) to launch a scheme—Axis Life Plan with a variable asset allocation plan. Now, ICICI Prudential Mutual Fund has followed suit and has filed its offer document to launch a scheme on similar lines—ICICI Prudential Lakshya Fund. This open-ended goal oriented fund, which is basically a fund-of-funds scheme, will follow an asset allocation pattern linked to number of years up to the end of a specified plan cycle. There would be six different plan cycles ranging from three years to 18 years. The asset allocation structure will change such that the scheme reduces its risk as it approaches the completion of the cycle. It would invest in equity and debt schemes of ICICI Prudential Mutual Fund or schemes of other mutual funds.

The scheme is structured such that an investor who has an investment goal of three years would invest in the three-year plan; those with a six-year investment horizon would invest in the six-year plan. ICICI further plans to provide its investors with a tool known as “Lakshya Calculator”. The purpose of the tool is to assist investors in determining the amount of funds required to be invested to reach the target amount, based on certain assumptions, such as anticipated inflation rate and expected rate of returns, which would be entered by the investor. Once the amount to invest is calculated, the tool would suggest one of the ‘Lakshya’ plans based on the number of years to the achievement of the goal.

The fund would be managed by Mrinal Singh who has nine years of experience and who manages 10 other schemes of ICICI Prudential. The schemes of ICICI Prudential MF have done reasonably well in the past compared to the benchmark.

On reviewing the Axis Life plan, Moneylife pointed out that their approach was too conservative for the long-term. For the plan with 15 years to completion starts with investing just 50%-55% in equities. The asset allocation of the ICICI plan is just the opposite and is far more aggressive. For the period up to five years preceding the end of the cycle of the plan the scheme would invest 90%-100% of its assets in equity funds. The allocation towards mid-caps and large caps funds changes over the number of years to the end of the plan cycle. For example, a plan with over six years to go would have a significant portion of its equity investment invested in mid-cap funds, with the rest in large-cap funds and this allocation to mid-caps would reduce subsequently in the years to come. This is in line with the strategy of the fund of taking more risk over a longer period. The asset allocation towards equity and debt changes in the last five years only. The plan would follow the asset allocation below:

 
This aggressive strategy of the fund can be disastrous for the investor given that market movements are never smooth. Moneylife research shows that with three years to the completion of an investment goal, to have around 60% to 80% in equities is extremely risky. Imagine the situation of someone who is supposed to need the money in late 2010. A lot of his wealth would be decimated in 2008. Markets can remain depressed for years together. In fact, this is the problem with all fixed formula-driven approach, as pointed in More than You Know by Michael Mauboussin. They are not flexible enough to take into account random and highly volatile market movements. A fixed formula approach in a stock market would produce random results. In other words, your Lakshya may or may not be met. (Read: Axis Life Plan: Fund of all Funds)

Apart from the changing asset allocation of equities over the years, a major change in asset allocation happens only in the last five years. An investor can easily manage this kind of allocation and does not need to pay a fund manager to do it. Secondly, as the majority of the investment of this scheme would be in ICICI funds itself, an investor would be better off if he is able to choose from the best performing funds available in the market. Thirdly, as this is a fund-of-funds scheme the investor would receive no tax benefit for investing for the long-term and would have to pay tax on capital gains. Long-term capital gain tax would be 10% (20% with indexation) and short-term capital gains would be taxed according to the income slab of the investor to the scheme.  
 

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Italian authorities move Kerala HC to quash FIR

The petitioners submitted that the Kerala Police have no authority to conduct investigation in the case and courts in India have no jurisdiction as the incident occurred beyond its territorial waters

Kochi: Questioning the jurisdiction of Indian courts and police, the Italian government and two naval guards of an oil tanker today moved the Kerala High Court seeking quashing of the first information report (FIR) charging the marines with murder of two fishermen while firing from the ship off the state coast, reports PTI.

As the diplomatic row between the countries continued since the 15th February incident, Italian Consul General in Mumbai Gian Paolo Cutillo and the two accused—Latore Massimiliano and Salvatore Girone—filed the petition seeking to quash the FIR registered by Kollam police in Kerala.

The petitioners submitted that the Kerala Police have no authority to conduct investigation in the case and courts in India have no jurisdiction as the incident occurred beyond its territorial waters.

The marines, suspected to have shot dead the fishermen, took the legal recourse two days after they were arrested by the state police capping four days of hectic negotiations between Indian and Italian officials on the issue of submitting them to Indian authorities.

Italy has been maintaining that the incident occurred outside Indian territorial waters and the marines’ action was taken assuming the fishing vessel to be carrying pirates.

In a related development, the court admitted a petition by the family of one of the deceased fishermen seeking Rs1 crore compensation and directed the owners of Italian vessel Enrica Lexie to furnish a bank guarantee of Rs25 lakh.

Justice Harun-UL-Rasheed admitted the petition by Doramma Valentine, wife of Valentine alias Jelstine (45), and issued notices to the ship owners, accused, and Cochin Port authorities.

The high court directed the port authorities to ensure that the ship is arrested in the port till the bank guarantee was furnished.

Ms Valentine’s counsel insisted on a bank guarantee for Rs1 crore but the court turned it down and limited it to Rs25 lakh. He complained that the in the eyes of the ship owners, Indian citizen will not have much value.

The petitioner, who sought the compensation from the ship’s owners, captain and the two marines, had submitted she did not have Rs8,18,400 to pay as court fees required under section 22 of the Kerala Court Fee and Suit Valuation Act and should be declared as pauper.

The shipping company objected to the petitioner’s plea to waive the stamp duty after declaring them as pauper.

Ms Valentine also filed an application seeking exemption from appearing in the court to present the petition.

The petitioner’s counsel informed the court that the last rites of her husband were underway and the family was in a state of shock and was not in a position to appear today.

The ship owners’ counsel contended that they had to pay Rs30 lakh per day for three days as demurrage charges to the port.

The vessel is berthed in the outer port area with the Coast Guard and police keeping a close watch.

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