Rich promoters, sick firms and business as usual

After a recent review of banking and financial institutions, Finance Minister Chidambaram remarked that the country cannot afford to have "affluent promoters and sick companies". This was after finding out that the NPAs (non-performing assets) of the banking sector have more than doubled from Rs 71000 crores in March 2012 to Rs 1.55 lakh crores in Dec 2012. A large proportion of these bad loans will result in provisioning and write-offs by the banks, most of which are PSBs (public sector banks).

This would ultimately be at the cost of taxpayers and the shareholders of these banks. Initial reports suggest that the Finance Minister's comment was directed at Vijay Mallya, whose company Kingfisher Airlineshas gone kaput. A The company owes more than Rs 7000 crores to a consortium of 14 banks, led by SBI (State Bank of India).

Kingfishernever made profits because its model of a full-priced service provider was not a viable proposition in a price conscious Indian market. It took over Air Deccan to address the budget airline market but failed to get a handle on its affairs and kept plunging into a deeper pit. In their first sign of support, the banks provided a lifeline to Kingfisher Airlines by converting Rs 1300 crores of debt to equity.

By some quirk of averaging rule (pre-set by SEBI � Securities and Exchange Board of India), the banks ended up getting these shares at over a 60 per cent premium to the market. These shares are almost worthless now. During the restructuring, Mallya pledged shares in his other companies as collateral and also gave personal guarantee. Taking a cue from the Finance Minister, the creditors have started selling these pledged shares in market to recover their money.

Kingfisher has come up with a revival plan but it will take nothing less than a miracle for it to make a recovery. No fresh investor is going to touch it even with a barge pole. And most vendors will not work with it again. It was reported that so bad was the financial position and operations management of the airlines during its last days of flying that it could not buy spare parts and kept rotating parts from one aircraft to the otherfor maintenance.

When the aircraft-leasing companies repossessed some of the Kingfisher planes recently, they found to their horror that key parts like engines, power units and even seats were missing. Finally, it will take a foolhardy person to seek employment with Kingfisher Airlines after all the suffering it has inflicted on its current employees. The creditors should sell whatever they can, cut their losses, and move on.

Another recent case of alleged corporate improbity involves Subrata Roy of Sahara Group. Along with a Formula One racing team, Roy shares with Mallya a taste for good life and friends across the political spectrum. His Sahara India group companies have run into problems with SEBI, which mandates that any public investment by more than 50 investors in a company makes it a public company bringing it under the purview of SEBI.

Forced to return the Rs 25,000 Crores which, SEBI thinks, were illegally collected from unsuspecting depositors, Roy has taken an aggressive stance and has challenged the SEBI chief to a televised debate apart from bringing out a series of advertisements, invoking "Bharat Mata", pleading innocence and accusing authorities of a witch-hunt.

A few back of the envelope calculations throw some doubts on his entire set-up. Sahara India claimed that it has 10.13 lakh employees and field workers. Even assuming an average of paltry Rs 5000 per month per employee in salary or commission, its wage bill comes to Rs 6000 crores per year. It spends over Rs 100 crores per year sponsoring the Indian cricket team.

It won a bid for the IPL Pune franchise for Rs 1800 crores and bought a stake in Mallya's Formula-One racing team for Rs 500 crores. While the best of businesses, world over, are suffering with the slowdown, Sahara does not seem affected. Apart from its claims of a land bank of 35,000 acres land, Sahara does not have any businesses of note or repute to speak of. It recently informed SEBI that it had already returned over Rs 20,000 crores to its depositors in four months, raising a few eyebrows. And its most recent entry to organized retails is baffling; at a time when most major retail players are losing money.

While it is clear that Mallya went wrong with his Kingfisher Airlines foray, only time will tell the modus operandi of Sahara and Roy. Meanwhile, in the drama of bank NPAs and of raising money from unsuspecting public, the plot remains the same but the artistes keep changing.