The good times hangover
The Vijay Mallya episode shows the need to plug holes that allow firms to exploit gaps in regulatory boundaries
This is not the best of times for the “King of Good Times”: The Vijay Mallya story doesn’t seem to be headed for a happy ending. Regulators, courts, banks and employees want him to pay up outstanding dues. The troubles of Mallya, the former chairman of United Spirits Limited and the now-grounded Kingfisher Airlines (KFA), must serve as a wake-up call for authorities in India. In 2011, a year before it stopped flying, KFA implemented a debt recast package after which loans from 13 banks were converted into share capital. Mallya said in a September 2011 letter to his shareholders that banks had converted 30% of their outstanding loans into preferential and equity capital. Lenders were allotted 116 million shares at a price of ` 64.48 a share on March 31, 2011, a huge premium to the closing price of ` 39.90 that day. Besides, lenders had slashed the rate of interest that KFA had to pay to 8% from 11%.
This leads to two basic questions. What prompted the banks to convert nearly a third of their outstanding loans into preferential and equity capital, and that too at such a high price? And two, why did the banks cut the interest rates for KFA by three percentage points at a time when persistent high inflation had pushed the Reserve Bank of India (RBI) to raise interest rates repeatedly? Three years after KFA went belly-up the lenders are asking the right questions by demanding their money back. But one does get the unsettling feeling that the lenders may be raising these questions three years too late.
India’s mounting bad loans suggest that the recovery processes for corporate loans are painfully slow. For instance, under strategic debt restructuring (SDR), the RBI allows banks to convert a part of their debt to majority equity in a defaulting firm. This is aimed at helping banks take control of the defaulting firm and effecting a change in management. While the defaulter loses control over the company, the onus of recovering the loan shifts to the bank. Banks are left holding a stake, as in the case of KFA, which is worth only a fraction of their collaterals. It is about time to plug the glaring regulatory holes that companies appear to routinely exploit.