Moneycontrol : Sat, Feb 25, 2012 at 14:59 : : CNBC-TV18
Kingfisher is fast becoming India's version of too big to fail. The company hasn't been able to pay its staff, taxes and now can't pay for fuel. But it's not just Vijay Mallya's money that's going down. Banks have lent over nearly Rs 7,000 crore in loans and hold a chunk of the company shares.
CNBC-TV18's special show Indianomics discusses if is it time banks walk into the boardroom and force a new management? Panelists include Former SBI Chairman, AK Purwar, Ashvin Parekh, partner of E&Y, and B D Narang, Former Chairman and Managing Director of Oriental Bank. But before that an outline of the problem from Gopika
Critics and columnists are writing Kingfisher's obituary. The company seems to be hurtling towards its end. Lenders are not ready to put in good money. Already Rs 7,000 crore of banks' money is stuck with Kingfisher. 8 out of 18 lenders have classified the account as non-performing loan in the third quarter.
Lenders are now insisting that the company clear off all the interest dues before they even consider disbursing fresh loans. Vijay Mallya may have committed to repay all over dues by March end, but how will Mallya raise this money? According to Veritas investment research firm, Mallya has very few options available both within Kingfisher and outside.
The cash starved airline company reported a loss of Rs 1700 crore for the 9 month period as against Rs 1006 crore in the same period last year. In Q3 alone, the losses amounted to Rs 444 crores.
The company does not have any assets to raise funds as it is already pledged with banks. Among group companies, Mallya could look at selling the remaining 55 lakh treasury shares in United Spirits. But that again will be difficult as it will dilute the promoter shareholding in the company which currently stands only at 28%.
Vijay Mallya is desperately looking for equity and is in serious talks with some big investors, meanwhile lenders who have not classified Kingfisher as non performing assets could also throw in a lifeline.
Here is an edited transcript interview. Also watch the accompanying videos.
Q: First let me get the legal issue out of the way. Under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act and other DRT notifications is it legally possible for the bankers to walk into the boardroom and say, I want another manager?
Parekh: There are two parts to this; when the MS Verma Committee was constituted which in fact created some kind of a blueprint for SARFAESI Act, at that point in time five methods of asset reconstruction were actually evaluated and different methods under which asset reconstruction can be carried out by the lenders, by banking companies was envisaged.
When the SARFAESI Act was enacted it very clearly gave the authority to the regulator that is the RBI to work out the regulations associated with each method of asset reconstruction.
Now change of management according to both the SARFAESI Act was envisaged and later on when RBI clarified on this position, has several other legal connotations. There can be recourse available to the management, judiciary intervention and a forced change in the management.
After keeping that into consideration the RBI has actually formed regulations with other methods of asset reconstruction but there is no clear regulation associated with the change of management.
If the management participates in such a programme with the lender, if the management agrees to work with the lender then of course you have a way out and it is not exactly legal. Then it is more business approach in which case the borrower readily agrees that if someone else were to run that business on his behalf there is a better chance, some order of governance can be put out but legally that's a position at this point in time.
Q: You are apprised of the problem itself since it hitting us in the form of daily headlines. Can a banker just walk into the boardroom and say I want a change in management; this is not working assuming of course options are available but can he do it?
Purwar: Actually I have not seen such a single case. We had a very well experience in the banking sector. Some of the section of accounts were sick but then unless and until management is with you and is agreeable to go long with you it represents the scheme of the things becomes extremely difficult.
Let me go back little to the sickness side of it, in the existing scheme of things we have SARFAESI but there is sick units, Board for Industrial and Financial Reconstruction (BIFR), as an institution. This corporate debt restructuring mechanism which is run by IDBI and my assessment has been that CDR mechanism by way of rehabilitation of sick units has worked far better and much more effectively and fruitfully then the system which is run by IDBI.
These existing institutions, their efficacy also needs to be seen but the present scheme of things its just corporation of existing management is vital for any tough decisions to be taken in respect of sick terms.
Q: I have spoken to bankers on the matter, they refuse to come of record because it is an ongoing problem and they do not want to aggravate by shooting their mouth as they put it but the airline sector itself is in quite a mess. None of the players are really working at a profit. Some of them are making minimal losses and maybe in some quarters they are making profit but otherwise it is quite a huge mess. Do you think in a situation like this the government itself has to intervene. Are we looking like a Satyam kind of a situation here where the government or CLB or the ministry of company affairs sits in with the bankers?
Narang: First I will address your first question legal position. Under the SARFESI Act RBI was supposed to have issued rules to change the management but they never finalised the rules so far. There were in fact consultations when the management can be changed, in those consultations we did make it clear that there should be a provision to change the management particularly under certain known conditions. My comments are only pertaining to large corporates not to SMEs. That is if there is a serious diversion of funds.
Secondly, at times promoters themselves are fighting with each other and not allowing the company to function. Three, there are serious cases of inside trading for which the company has come to trouble. But if it is a normal routine but RBI has so far not made up their mind. They have not come out with clear rules for the change of management. In one of the cases where we were 100% lenders and we have taken the physical possession we did move for the change of management but the promoter got stay from the Chandigarh High Court.
I have a clear example, that this particular case, industry they have been fighting with each other. In fact they have been trying to under price their products to win over the customer base. All such activities they cannot be funded by bankers itself.
Funds for acquisition of customers in a loss making activity have to necessarily come from equity. All such people have been primarily funded by the equity and to small extent by the lenders. Unless they change the very business model and the overhead structure cost, overhead structure tax, overhead structure change they can never make serious money.
At least in half a dozen occasions on various public forum I have found all the promoters admitting that they don't hope to make money for a considerably long time to come.
I don't know why the bankers didn't pick it up. This money had it come from the private equity by now the problem would have been reduced to one third. I felt that at this stage you change a management it does not bring results because the promoter himself as a credibility. If he goes to the market he can still use his contacts and bring in some equity.
I must say that I don't think Mallya is a wrong face to call for equity, in fact he is the right face. In this particular case you do not built up a good case to forcibly to change the management. Maybe if the contacts were that of Satyam one could argue that change of management will bring equity player but not in this particular case.
Q: Do you think that the law needs to be fashioned or at least the bankers needs to be empowered in such a manner that change of management is more effective. What is the process for change of management, is it just a 90 day notice or is it much worse?
Parekh: No, it is much worse. The first thing that will happen as Narang said is the borrower will immediately obtain a stake for example from the court. If he is got convinced to begin with that there will be any value addition on account of that change how will the bank be able to run it.
So unless the bank puts up a convincing story to say that this is a programme on part of the lender to really work out a management programme or a change in management programme he has the judicial system available to him basically.
Q: What is the option in the existing case only by way of example bankers or public money, depositor's money is Rs 7,000 crore and 58% of what it be say Rs 500 crore capital. Mallya's money is about less than Rs 300 crore. There is no justice that bankers should not effect the management when they have put in so much money, but what is the hurdle then?
Purwar: First of all let us look at the industry and then the management side. If we think of changing the management, first do we have the legal tools to do so, I have my own serious doubts about it, we do not have legal tools to do so. The second question is even if you have legal tools to do so is it correct to do it.
I think that in itself will be debatable in the context to what Mr. Narang said, but the basic point remain that is it necessary as a tool for the bankers to have it, I absolutely think rocess should be laid down that the money has been diverted or the industry has become irrevocably sick for whatever reasons.
Bankers and lenders as a community should have powers to effect changes. Let me give you a simple example that when the steel sector was in a very bad shape and there were certain players who were very good and they were very keen to acquire these companies to scale up the capability and they had necessary capability to make it happen.
However, they just couldn't affect this change, but the laws of the land were such that we were not having any option to do so.
Q: Any specific change you would suggest Mr. Narang, assuming you are agreeing with what Mr. Purwar says?
Narang: I do not know a single businessman on the earth who has not come to bad times. I do not know a single business on the earth, which has not come to bad times. And in difficult situations I find the companies are leveraged as many 20 times than their net worth.
Why should the management not be changed? There could be an argument that this was of no fault of the entrepreneur, this was extraneous considerations.
I will say that let the RBI or let the Ministry of Corporate Affairs lay down the clear rules that wherever the grounds of difficult situation are fraud, are based on dispute or inside trading or any other such objectionable.
After fulfilling following conditions the banks, maybe 75% of them if they vote together they should be able to change the management. Why should there not be rules, there must be rules for change of management. This itself will curb adventurism.
Q: What is the way out now? Is it that you should have the government step in?
Purwar: The point is that maybe I maybe wrongly believing it, but what I believe in is that government should try to keep away from business as much as possible. Secondly let us look at present structure of restructuring and rehabilitation, which are available in the system.
I had a very great experience in curbing debt restructuring mechanism, which is run by IDBI and I have seen it's success in very large number of cases.
Q: He has gone through CDR, I mean not exactly CDR but a debt revamp is over and done.
Purwar: There is the difference between a debt revamp and a compressive corporate debt restruction mechanism which imposes a lot of discipline on lenders, a huge amount of discipline on the part of the promoters.
Most importantly in my view Kingfisher today requires huge amount of equity infusion. Equity infusion whether its government, private sector, private equity or foreign airlines would like to do it. I think these questions need to be thoroughly examined enabling legal mechanism or enabling mechanism need to be put in place.
Q: I take Mr. Purwar's point that government should stay off as much as possible but in the extra ordinary circumstances where the government has intervened through some technocrat like in the case of Satyam where they got in Mr. Achuthan and Deepak Parekh and Karnik, it worked very well. So in this specific case since there is no fraud involved but probably wrong pricing and wrongly run company. Wouldn't you say that bankers are not empowered to take certain decisions. Some extra ordinarily legal munificence has to be shown that can be shown only by government. I am only asking you for options out of this mess.
Narang: There are three options available. 20 years ago when I used to travel from Delhi to Mumbai the ticket was Rs 5300. Today again the ticket is available for Rs 6000. Something wrong has gone somewhere; meanwhile petrol prices are gone up by almost 60 times, labour prices have gone up double and now we have landing charges which are troubling.
This is across the board, now to that extent the problems can be identified across the board; some sort of government intervention could be helpful. You can't kill the whole industry.
Second part is the under pricing part still, why should the government expect the ticket to be available at Rs 5300 and why should it not be made available at a market price. So they should be first, I know I am working with 8 or 10 private equity people and I know the rigorous scrutiny they do.
This is a clear case that there has to be some check on the management on various pricing issues. If bankers have to put in money, I'll say they should insist equity participation by the private equity before they put in their further money. Because if they can't step in at least other professionally trained people can step in who can keep a control on the various operating efficiencies of the company.
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