Column: Banks a little too late in acting on Kingfisher Airlines

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Updated: March 12, 2016 8:28:20 AM

They should have pulled the plug in October-November 2010, when deep restructuring was undertaken

The account of KFA was restructured in 2010 when 30% of term loan was converted to equity and a portion of working capital was converted to term loan, i.e. Working Capital Term Loan (WCTL), indicating that there are no assets to support this portion of debt. This happens either because of losses or diversion of funds. (Reuters)The account of KFA was restructured in 2010 when 30% of term loan was converted to equity and a portion of working capital was converted to term loan, i.e. Working Capital Term Loan (WCTL), indicating that there are no assets to support this portion of debt. This happens either because of losses or diversion of funds. (Reuters)

Kingfisher Airlines (KFA) is a classic case of closing the stable door after the horse has bolted. This incident has generated a lot of heat inside and outside Parliament. Let’s view the whole issue dispassionately.

The account of KFA was restructured in 2010 when 30% of term loan was converted to equity (without taking controlling stake or appointing any one on the Board of the company, as is done now for strategic debt restructuring), and a portion of working capital was converted to term loan, i.e. Working Capital Term Loan (WCTL), indicating that there are no assets to support this portion of debt. This happens either because of losses or diversion of funds. The rating was below investment grade. Additional limits were sanctioned to keep it afloat.

An introspection reveals that bankers should have pulled the plug in October-November 2010, when deep restructuring was undertaken. Despite this, KFA made a desperate attempt to borrow small sums from individual banks; their borrowing from the United Bank of India (UBI) in January 2012 of R7.5 crore on the strength of letter of comfort by SBI became the rallying point based on which the UBI was first to declare Vijay Mallya and other directors as wilful defaulters (September 1, 2014). When the UBI demanded repayment of this small amount, the management brusquely turned it down and the SBI letter of comfort remained only a piece of paper.

It’s noteworthy that the Federal Bank and Bank of Baroda at one time wished to provide the company with the facility to escrow their credit cards and other receivables, but the company chose to open the account with HDFC Bank without taking permission from consortium. Even post facto confirmation was granted to KFA to maintain its account with HDFC Bank subject to strict conditions, which were not adhered to. KFA was operating its account with two other private sector banks and not routing all transactions through the escrow account opened when the debt restructuring agreement was signed during 2010 on such liberal terms. A small bank like the UBI became the first to file a winding up petition in the Karnataka High Court in March 2013 against UB Holding under Sections 433(e) and 434(1)(a) and (c) of Companies Act 1956. This was done after the UBI invoked the guarantee of UB Holding on February 25, 2013. The spirit of consortium was lost as no one ever tried to discuss this wilful default tag and winding up matter in any meeting with the UBI, so as to take further action collectively from that point onwards.

Interestingly, CMDs of two big banks, in a meeting in Delhi, informed the Secretary, Department of Financial Services, that hardly any good lawyer comes forward to present cases of banks in High Courts and the Supreme Court against big borrowers like KFA and others. This was in response to the suggestion put forward that good lawyers/firms be engaged for contesting cases of big defaulting corporates. Such is the predicament of bankers when it comes to the crunch. Against this backdrop, the UBI had requested Attorney General Mukul Rohatgi to present its case when a Special Leave Petition (SLP) was filed by KFA before the Supreme Court. The Bench pronounced it as infructuose, as the UBI had declared KFA and its directors as wilful defaulters, 30-odd minutes before it came up for hearing—a smart move by the chairman of the committee (i.e. this author and then ED) and members (GMs) of the grievance redressal committee of the UBI.

If the government and other agencies are serious about recovering public money, then let them show their pious intention to get R192 crore with accrued interest from Airbus Industries against which a case was filed in DRT Bangalore. The advance payment for purchase of aircraft by KFA was given to Airbus and the purchase order was subsequently cancelled. A pre-delivery payment (PDP) advance was given by three banks—UBI, OBC and Corporation Bank—on the basis of the agreement between KFA, Airbus and OBC (acting as leader on behalf of three banks). When the aircraft have not been delivered, then the advance payment given to Airbus ought to be refunded. Airbus attempted to wriggle out of this contract by pleading in DRT Bangalore that it had no jurisdiction in the matter. The presiding officer of the DRT attached this sum lying with Airbus by pronouncing that the contract was signed in India between banks, KFA and Airbus for the purchase of aircraft, to be delivered in India, and the money was paid by banks in India.

Another issue which is hotly debated is about the recovery of public money of nearly R9,000 crore (of banks). Mallya must have given his personal guarantee in 2010 when the restructuring was done. If that be so, his personal assets can be identified and the DRT can be requested to do attachment before the judgment, if not done already. The DRT can’t be asked to impound the passport, which can be done under Section 10 of the Passport Act, but the pending request of bankers to empower the presiding officer of the DRT to do so is worth considering. The winding up of UB Holding can yield recovery, as some amount has been ordered to be kept aside by the High Court when the petition was admitted, but recovery from his assets which are outside India is a long haul and his extradition may have interesting legal issues coming up for consideration.

The author is former executive director, United Bank of India

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