Kingfisher: Banking imprudence, crony capitalism, failed regulation & poor corporate governance
Moneylife Digital Team 22 February 2012

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 (

9 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
10 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
10 years ago
Sorry. Pl. read TOI in place of Eco. Times in my post 56 minutes ago.
10 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
10 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.
10 years ago
It is time corporates realize the need for good corporate governance. All these corporate failures are because of audit failure. Please see
dayananda kamath k
Replied to sibichen comment 10 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
10 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
10 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.
10 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 -
Shibaji Dash
10 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
10 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.
10 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
10 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/-. !!
Replied to G Ravishankar comment 10 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
10 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.
Free Helpline
Legal Credit