Untangling the Mallya web

Untangling the Mallya web

Mallya kept borrowing more and more to keep KFA flying - putting up his shares and other assets as collateral to keep getting loans from banks.

Vijay Mallya is back in the news - this time over his meeting with Finance Minister Arun Jaitley - in Parliament, just before he left for better climate abroad. As expected, the BJP and the Congress are blaming each other for his escape. The Congress holds that the BJP tipped him off and allowed him to decamp (with apparently 32 suitcases and a lady friend in tow) just before his passport was to be cancelled. The BJP meanwhile holds that he was given loan after loan during the UPA years, at the behest of prominent Congress leaders.

There is a bit of truth in both allegations I suspect. Mallya was close to all political parties. He was also friendly with many bureaucrats, police officers, bankers and journalists, apart from models, photographers and movers and shakers of high society. He had scaled up the liquor empire (which his late father had built) and he was a flamboyant businessman known for his colourful parties. Certainly he was elected twice to the Rajya Sabha - something that would not have been possible without support from both Congress and BJP.

And it is quite possible that he had got a friendly tip that his irate lenders were about to move court to cancel his passport. It is also a fact that the CBI diluted the notice sent against him to the Interpol, which helped him wing his way before the government woke up. What is often missed in all the noise currently about Vijay Mallya's escape was that he was considered a big and pretty savvy businessman for several decades until the Kingfisher Airlines debacle. His liquor empire - USL for hard liquor and UB for beer - were the market leaders by a huge margin. They were pretty profitable as well. In 2012, his spirits empire had revenues of over Rs 9000 crore and gross profits of Rs 1000 crore. He started numerous businesses - telecom, fertilisers, fast food (pizza), engineering, healthcare, hospitality. He bought companies - paints, fertilisers and others. He also sold things off from time to time, including the Kissan jams. He closed many other businesses he started, before any of them could seriously hurt his liquor business.

The problems really started with his foray into the aviation business. He certainly created a full service airline which provided great customer experience. Unfortunately, it made losses from day one. It was not alone - the airlines business is a tough business and more businessmen lose money than make it in this arena. Worthies such as Captain Gopinath, the Marans and Sahara group have failed in this business. Even Jet, run by Naresh Goyal, has been in trouble multiple times in the past (and is still in big financial trouble currently).

Mallya kept investing and bankers were happy to lend him ever bigger sums comforted by the fact that the spirits business and the rest of the Mallya empire was throwing up enough cash to keep paying the interest. Kingfisher Airlines never made profits but it would probably have continued for a few more years if it hadn't been for the fact that Mallya decided to buy and merge the loss making Deccan Airlines (started by Captain Gopinath). That was a disaster that KFA never recovered from. The original KFA was already making losses and the added burden of Deccan pushed it deeper in the red.

Mallya kept borrowing more and more to keep KFA flying - putting up his shares and other assets as collateral to keep getting loans from banks. The banks were happy to continue lending. He pledged his shares and took in partners in his liquor businesses (Diageo for USL and Heineken for UB)

Meanwhile, in 2010-11, the government was pretty worried about the aviation sector. Most airlines were deep in the red (except Indigo). Jet and KFA were both making enormous losses, and both were looking for strategic investors. Mallya had got much of his KFA debt converted to equity for lenders at a premium to the share price, and bankers were still under the illusion that he would find a partner. But as it happened, Jet managed to find one and KFA grounded all its planes by 2012.

The problems for the bankers started when they tried to get their hands on the collateral. Mallya, despite having put them up while taking loans, kept using the courts to stymie the bankers. He eventually lost control of his liquor empire and all his companies because of his pledged shares and his defaults. He also lost some of his physical assets like his villa in Goa, where many parties are held.

Unlike the cases of Nirav Modi or Mehul Choksi, Mallya actually ran highly profitable, public limited companies before he got into trouble through his aviation foray. There is a suspicion that when his business was going down he moved a lot of money - from loans to his businesses as well as personal assets - abroad and that could well be true. The investigating agencies are trying to find out.

In terms of his total loans, when he defaulted the principle amount he owned was probably a bit over Rs 6000 crore, while interests had piled up to make the total amount Rs 9000 crore. Much lower than the loans outstanding against some of the tycoons who borrowed heavily for infrastructure projects.

Why does Mallya generate so much publicity when defaulters of bigger loans manage to stay away from the limelight? I think it was partly because he led such a flamboyant life and he kept throwing lavish parties even when he was neither paying salaries to his aviation company employees nor to the bankers. I also think if the IBC had been enacted earlier, KFA would have declared bankruptcy and Mallya would have got away free with the rest of his empire intact.