Crony Power? Why Mallya’s Mortgaged Assets Don’t Sell Even With Price-Cuts

Bankers stuck with absconding businessman Vijay Mallya’s properties are finding that the collateral is simply not encashable. Repeated attempts to sell his mortgaged assets, including Kingfisher House in Mumbai and Kingfisher Villa in Goa, have found no takers. And this despite lowering the reserve prices.

An Economic Times story today (31 March) says that potential buyers are staying away from auctions fearing prolonged litigation in case the properties they bid for are claimed by other litigants. Mallya, who fled to London in February 2016 fearing arrest after his default on Kingfisher Airlines loans worth Rs 9,000 crore, is now facing an extradition request from India.

What the Mallya experience shows is that even with collateral, the problems involving wilful defaulters may not be easy to resolve. The bankruptcy code, still untested in courts, will not be useful if collateral cannot be easily disposed of despite bankers holding clear titles. Potential buyers may thus need to be indemnified against future legal wrangles. This deterrent against litigation after an auction should be written into the bankruptcy code, assuming it is not already there in some form. It may need to be made explicit.

However, there may be an unstated reason why the properties of high profile businessmen like Vijay Mallya or Subrata Roy (of Sahara) do not attract buyers: the ties of crony capitalism run deep, and it is unlikely that bidders who know Mallya or Roy will be eager to buy their properties and court their displeasure, if not enmity.

Subrata Roy, for example, has been in jail for more than two years, but he has been unable (or unwilling) to raise the Rs 10,000 crore demanded by the Supreme Court for his release – even though he claims his group owns properties worth several thousands of crores.

Sahara’s Aamby Valley alone is said to be worth Rs 39,000 crore, and the court threatened to auction it if he does not pay up by mid-April.

But in the light of the Mallya experience, this may be an empty threat. The question the court should ask itself is this: if not a single worthwhile Sahara property has been auctioned five-and-a-half years after it ordered him to repay deposits of Rs 24,000 crore in two group companies that raised money illegally, what is the chance that a huge property like Aamby Valley will be sold even now if there is an auction? Who will take the risk of buying a Rs 39,000 crore property, if properties worth around Rs 100 crore are not going under the hammer in Mallya’s case?

There are only two or three ways to ensure that this farce, of banks not being able to sell Mallya’s collateral (or Roy his properties), ends.

One is to appoint an official liquidator for all their properties – and not just their mortgaged ones.

Second, the government should bring an ordinance to indemnify buyers from the consequences of any subsequent litigation. This way good properties may find foreign buyers, who will surely trust the government’s indemnity. Parliament should be able to pass this bill, since it has been criticising the government for letting Mallya escape. It cannot afford to block this law.

And third, properties that can be bought at the reserve price by government departments or companies – assuming they need them - should be disposed of this way. For example, there is no reason why ITDC should not buy Mallya’s Goa beachfront property at less than Rs 90 crore, assuming it is indemnified by the government on litigation. The same could apply to Kingfisher House, which is located in a prime area near Mumbai airport, which the IT department could adjust against its claims, and use an office or residential place. Only government can take on recalcitrant businessmen like this, and in both these cases, Mallya and Sahara, this is the way to go.

The only way to defeat crony capital is to show them that it will cost them.