The Kingfisher Airlines Outrage
Dr Vijay Mallya was one of the most successful Indian businessmen of the 90s and 2000s. He had inherited a massive business empire from Dr Vitthal Mallya. However, his skill and expertise at growing the business was legendary.
Critics expected Vijay Mallya to flounder away his wealth thanks to this flamboyant lifestyle. However, Mallya managed to grow it many times over. The liquor business was flourishing under Vijay Mallyas command and his business had also diversified to become a formidable conglomerate. One of the many laurels in his cap was the fact that Forbes estimated his net worth at being over a billion dollars and placed him on the list of being one of the richest people in India as well as the world.
However, this illusion of success was soon to fall apart. Today, the Kingfisher and United Spirits corporations owned by Vijay Mallya are in ruins. Creditors are lining up on the doors to recover their dues but are unable to do so. Employees have not been paid salaries for several months. Some of them have committed suicide because of the financial duress caused by Vijay Mallya. Vijay Mallya is currently a fugitive, who is staying in London trying to evade the arm of the Indian law.
The media trial conducted in India has already blamed Vijay Mallya for everything that went wrong. His flamboyant image added fuel to the fire as his name became synonymous with recklessness. Today banks are petitioning the Supreme Court to impound Vijay Mallyas passport.
But the question that arises is whether all these banks are mere victims of the Kingfisher saga. If so, arent there checks and balances in the system that stop people like Mr Vijay Mallya from exploiting it.
In this article, we will try and figure out the banks fault in the entire conundrum.
Concept of Limited Liability
First of all, there is enormous outrage over the fact that Vijay Mallya continues to have lavish parties and owns yachts while he still owes money to creditors. Recently when he donated 3 kgs of gold to a temple, the outrage became all the more evident.
However, this outrage is merely of moral nature. It has no legal implications. This is because the law in India and elsewhere provides corporations with limited liability. This means that Vijay Mallya and Kingfisher are two separate people in the eyes of the law. Therefore, if Kingfisher owes money to people, Vijay Mallya cannot be held liable for it. His liability is limited to the extent of capital that he has contributed in the company.
It seems strange that the common man wants Mallya to share the profits with all the other shareholders but take losses all by himself! Dr Mallya is just a shareholder of the firm as well as an employee. His liability is just limited to the value of his shares and his salary. His personal wealth obtained by pursuing other businesses cannot be legally attached to pay the dues outstanding to Kingfisher employees.
- Poor Collateral: Banks that have lent their money out to Kingfisher have taken the worst kinds of collateral possible against the loans that they made. For instance, Grant Thronton valued the Kingfisher brand at over 3500 crore and a public sector bank mortgaged the brand and lent out money against an intangible asset! This is mind boggling to say the least. When things went haywire, the same bank tried to sell this brand, currently valued at a mere 6 crore and still could not find any takers. By taking such poor quality assets as collateral for their loans, bankers were simply doling out free unsecured money to Vijay Mallya.
In another case, another bank lent out a huge sum of money against Mallyas working capital. This working capital includes office stationary, folding chairs and boarding pass printers! It is extremely strange that banks have lent money out against collateral which does not have any value. They are now trying to seize the remaining assets to recover their dues. However, there is very little that they are likely to recover from the bag of random junk that they took as collateral.
In yet another case, Vijay Mallya supposedly pledged two helicopters to obtain a sizeable loan. However, the bank that made the loan is still struggling to recover its dues. This is because the choppers were defunct and therefore of no value. The bank is currently trying to sell the spare parts of these choppers and recover whatever it can!
Lastly, Vijay Mallya had pledged promoter shares of Kingfisher airlines in lieu of a loan. However, the value of shares fell from 2400 crore to a mere 6 crore leaving the bank with a huge loan which is impossible to recover!
Therefore, banks are not completely innocent in this entire outrage. They have been grossly incompetent at worse and possibly hand in glove with Vijay Mallya. How else could they have completely side lined the due diligence process and given out loans against piles of junk!
Vijay Mallyas personal assets therefore cannot be attached to pay off Kingfishers dues. The selling of his mansion in Goa and his office in Mumbai could take place because he had pledged the assets to the banks as personal guarantees. Had not provided such guarantees, no bank would have had the right to even lay a hand on his property let alone seize it.
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