Mallya May Have Sold Banks A Pup By Offering Kingfisher Brand As Collateral

The Debt Recovery Tribunal (DRT) yesterday (7 March) froze Diageo’s $75 million payment to Vijay Mallya for exiting United Spirits Ltd (USL) till the case involving Kingfisher Airlines’ Rs 7,000-crore dues to banks is decided.

However, one of the mysteries is how banks managed to lend Mallya so much with so little real collateral. Especially collateral of doubtful value.Normally, banks are not in the business of extending unsecured loans except by way of personal loans at exorbitant rates to individuals.

But in the case of Kingfisher Airlines, banks, led by the State Bank of India (SBI), a large part of the loans were secured only against the Kingfisher Airlines brand – but excluding the more valuable Kingfisher beer brand.

It is common knowledge in accounting and legal circles that intangibles like goodwill and brands are valued with gay abandon. This is why international accounting standards long ago banned intangibles from appearing in balance-sheets unless they were bought from someone else.

And even if an enterprise brazens it out and shows intangibles in its balance-sheet so as to window-dress its accounts, bankers of all people should know better than to fall hook, line and sinker for the bait. They were essentially lending against thin air.

Since it is unlikely that a loan against such collateral would not have been made without political pressure, the question is who applied the pressure? An impartial enquiry can easily bring this out, since bankers, if put under the microscope, will surely tell all.

There were reports that Mallya offered boarding passes as part of payment arrangements, but a hard-nosed banker would also have insisted on creating an escrow account where receivables would be used to repay the loans. Clearly, banks acted with monumental naivete in the Kingfisher case.

With not much to show by way of solid tangible assets and with the bulk of the fleet of aircraft being on lease and with the equity base being deliberately kept low, it was essentially banks which kept Kingfisher flying all these years.

But they were obviously in such awe of Mallya that they did not advise him against buying Air Deccan, another airline that was sinking fast without adequate capital. Mallya bought Capt GR Gopinath’s 26 percent at a whopping Rs 150 per share when the market price was Rs 57. To be sure, controlling interest usually comes at a premium, but Mallya was buying a pig in a poke if not going on an ego trip.

However, it is not unlikely that Mallya knew the banks would pick up the tab, and friends in high places would have helped. The Modi government should find out who these friends were. They are as guilty as the buccaneer, flashy businessman.

Bringing them to justice would hold out lessons against crony capitalism and behest lending. The valuer who put a rash figure of Rs 7,000 crore on the Kingfisher Airlines brand must also be asked a few tough questions. But he should not be made the scapegoat for the crimes of bankers and Mallya’s friends in high places.

There are now reports that Mallya wants to smoke the peace pipe with banks, by opting for an one-time settlement. Having smoked the peace pipe with Diageo, this is not unthinkable.

But there are two issues here: while Mallya cannot be arrested or harassed just because he ran a failed business, if he has broken any law he needs to be brought to book on that. Doing that will send a good message to other businessmen who think bank money is there for the taking.