Vijay Mallya moves court against lenders

Mallya’s petition signals that the process of loan recovery could well be fraught with prolonged legal battles for the lenders to the airline. Photo: Mint

 live Mint :P.R. Sanjai :Tue, Apr 02 2013. 12 40 AM IST

Move aimed to prevent Kingfisher airlines creditors from selling shares in United Spirits, Mangalore Chemicals and Fertilizers

Mumbai: Vijay Mallya’s UB Group, promoter of Kingfisher Airlines Ltd, petitioned the Bombay high court last week to prevent creditors of the grounded airline from selling shares in group companies United Spirits Ltd (USL) and Mangalore Chemicals and Fertilizers Ltd (MCF) that it has pledged as loan collateral.

The petition signals that the process of loan recovery could well be fraught with prolonged legal battles for the lenders to the airline. The petition will come up for hearing on Tuesday.

A consortium of 14 banks with combined exposure of Rs.7,000 crore to Kingfisher Airlines has started selling shares in USL and MCF that Mallya offered as collateral when the airline’s debt was restructured in 2011, according to two bankers who declined to be identified.

“We have started selling the shares. The group has moved court, but we are confident that we will be able to recover part of our money through the sale,” one of the bankers said.

Kingfisher Airlines has been grounded since 1 October, first because of staff protests over unpaid salaries and thereafter because of regulatory issues. Its flying licence expired on 31 December and a revival plan prepared by the airline to start limited operations this summer failed to convince the aviation regulator.

The Directorate General of Civil Aviation (DGCA) would like to see no-objection certificates from airport operators, aircraft leasing companies, certificates of support from maintenance firms and spare parts vendors of Airbus aircraft and salaries paid before the airline can fly again, Mint reported on 16 January, citing a DGCA official who didn’t want to be named.

The move by UB Group to petition the high court indicates the legal uncertainties that creditors of the airline are likely to encounter in the process of recovering the money they are owed.

Mallya did not reply to a query seeking a clarification on the development, but a senior UB Group executive confirmed that a petition has been filed.

For their part, the lenders are preparing to file a petition in a debt recovery tribunal (DRT) against the airline under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act after recalling their loans.

This could happen before the end of this week. The Act allows secured creditors to move a DRT to recover their money.

Recovery cases at a DRT are cleared relatively faster than conventional legal means, but a borrower can move a higher court against decisions by a tribunal.

State Bank of India (SBI), the leader of the creditors’ consortium, has the maximum exposure at Rs.1,600 crore to Kingfisher, followed by Punjab National Bank, or PNB (Rs.800 crore); IDBI Bank Ltd (Rs.800 crore);Bank of India, or BoI (Rs.650 crore); Bank of Baroda, or BoB (Rs.550 crore); United Bank of India, or UBI(Rs.430 crore); Central Bank of India (Rs.410 crore); UCO Bank Ltd (Rs.320 crore); Corporation Bank (Rs.310 crore); State Bank of Mysore, an SBI associate bank, (Rs.150 crore); Indian Overseas Bank (Rs.140 crore);Federal Bank Ltd (Rs.90 crore); Punjab and Sind Bank (Rs.60 crore) and Axis Bank Ltd (Rs.50 crore).

Overall, their exposure is Rs.6,360 crore, with unpaid interest taking it up to Rs.7,000 crore .

Apart from shares in USL and MCF, the lenders hold two UB Group properties in Mumbai and Goa and two helicopters, besides the Kingfisher Airline brand as collateral in addition to a personal guarantee from Mallya.

“We are confident of recovering about one-fourth of our exposure through share sale and sale of properties and helicopters,” said the first banker cited above.

On Monday, USL shares lost 0.45% to close at Rs.1,889.45 each while MCF’s shares rose 13.52% to end at Rs.32.75 on BSE.

Lenders have turned up the heat on Mallya after Diageo Plc of the UK in November agreed to buy a 53.4% stake in USL for Rs.11,170 crore, including an open offer to buy 26% from public shareholders.

Finance minister P. Chidambaram recently called upon banks to aggressively push for the recovery of bad assets and chase the “affluent promoters” of “sick companies”.

There are other lenders to Kingfisher outside the consortium. They are Srei Infrastructure Finance Ltd(Rs.430 crore), Jammu and Kashmir Bank Ltd (Rs.80 crore) and Oriental Bank of Commerce (Rs.50 crore). A debt fund operated by Kolkata-based Srei Infrastructure bought ICICI Bank Ltd’s exposure to the airline in July 2012.

The non-banking financial company and Jammu and Kashmir Bank have shares of USL and McDowell Holdings Ltd as collateral.

Another senior banker, requesting anonymity, said the consortium had empowered a core group formed to recover debt to take legal actions against the UB Group. The members of the core group are SBI, PNB, BoB, BoI, IDBI Bank and UBI.

According to consulting firm Capa, Kingfisher Airlines’ suspension of operations has had a knock-on impact on the global leasing and financing sector, highlighting some of the challenges facing aircraft financiers and lessors in the Indian market, besides raising concerns about regulatory safeguards with regard to international investment in the country.

“The continued delays by the Indian government to de-register Kingfisher-operated aircraft since it suspended operations in October 2012 is also expected to hurt other, still-operational, Indian carriers while also creating the impression that India is not adhering to the Cape Town Convention, of which it is a signatory,” Capa said in a report.

The Cape Town Convention is an international treaty aimed at standardizing transactions involving movable property. In this case, India will have to facilitate smooth transfer of aircraft to owners if an airline defaults in lease rentals.