Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial

Of Kingfisher and Mallya's Pot of Gold


There is tremendous outrage that Vijay Mallya, the flamboyant chief of the ailing Kingfisher Airlines has donated 3 kilograms of gold to a temple, while the airline has not paid salaries to its employees for nearly a year and owes over 8,000 cr. ($1.5 bn) to various creditors.

I don’t defend Mallya – while his surname and mine might suggest a relationship, let me state unequivocally that it is limited to beer – my liking and his manufacturing of it. But I’d like to take the discourse to a different level – away from knee-jerk outrage and to a more deeper and constructive debate about the real issues this situation throws up.

But First, Misplaced Outrage

The outrage is about why Mallya is donating gold while his airline’s employees or lenders suffer. See a particularly vitriolic take by Swaminathan Aiyar:

How can a man who owes enormous sums to employees and creditors be free to throw gold around like small change? If there were any justice, surely the gold and golden doors should be seized from the temples and handed over to the employees and creditors. Surely they should have first right to Mallya’s assets.

Surely they should not. First, Mallya doesn’t owe employees anything. Kingfisher Airlines does. Mallya is at best a partial owner, and is also possibly an employee of the airline. Anyone with a share is an owner of the company – does that mean they all should fish into their own pockets and pay all employees their salaries? Obviously not. The company is different from the individual; this is the basic concept of limited liability, that individual owners of shares are not liable for the debt of the company as a whole. That means that any individual shareholder has no liability for debts that the company has – if this was not so, none of us would be buying any shares in stock markets.

That Mallya was a "controlling shareholder" has no impact on limited liability. You might think, he runs the company, shouldn’t he be responsible for the debt? The answer is: no. If there are profits made, the profits are shared across all shareholders (dividend, or valuation or whatever). Mallya will draw a salary and a bonus (if he’s an employee). So why should he take the responsibility for the downside when he has to share the upside with shareholders? (If you think that he will embezzle money or siphon out any profits, please go to the "Fraud" section of this post) Same with employee salaries; the company is responsible, not Mallya. HT Atul Karmarkar for excellent links on both Indian law and the earliest UK judgement on the topic. 

Let’s also take a look at the ownership pattern of KFA. Promoters own just 36% of shares, almost all of which are pledged against loans taken. This itself is strange but normal in India – taking promoter shares as collateral for loans given to the company. If you consider the "Company is not Mallya" premise, then all collateral should have been owned by the company; but Mallya’s shares are not company property. However, let this go. Promoter shareholding has come down from 60%+ in March 2011, due to exercise of pledges by lenders.

Promoters in KFA’s case is again, not just Mallya. The 32% owned by them are like this:



% of co

United Breweries (Holding) Ltd



Kingfisher Finvest India Ltd



Dr Vijay Mallya



UB Overseas Ltd






The biggest owner is UB Holdings, which is a listed company and has only 50% owned by the Mallya gang. Financial institutions own 15% of KFA already, and if they convert the promoter shareholding into their name, will own about 45% of it. They can do that and take ownership of the company – what will we do then, go to the SBI chairman and demand that he sells his car to pay airline employee salaries?

This kind of moral outrage is silly. Mallya’s gold is Mallya’s gold, not an entitlement of shareholders or employees. It might be a property of the lenders, who for some strange reason, have chosen not to exercise their rights.   

Fraud or not?

Seething in anger are those that think that Mallya obtained his gold fraudulently by using KFA money. While I can’t comment about how he obtained gold, let’s be a little practical. Mallya runs a very successful liquor business, selling beer and whiskey and lots of other forms of alcohol. This is a ridiculously profitable business. This is also a very cash-generating business – as in, it can easily generate "black" money. If he is the sort, then the airline would be pretty much last on his list of businesses to get such money from – liquor is far easier to take money from. So if people are angry, it should be shareholders of the liquor businesses, not the airlines.

Secondly, there isn’t a single "suit filed" case in CIBIL with the name of Mallya or Kingfisher Airlines, which now reports all suit-filed cases for defaulters of Rs. 1 crore and above. Does this mean banks don’t consider that Mallya has frauded them? Does this mean they won’t even file a case – forget getting a judgement – just put the darn papers that cobble together even a coherent case of fraudulent behaviou
r by Mallya?

I’m hoping the answer is that banks are to blame. (Read the next section) If there is fraud, and Mallya is responsible, then he should be booked. And that gold taken away. But someone affected must at least file a case, otherwise it leaves us wondering if there was provable fraud at all.

Remember that Mallya will still be in trouble for not paying employee taxes (TDS), not paying into their retirement/provision fund accounts, for a bounced cheque, and for any tax violations. These are not covered in limited liability. And there may be civil penalties if they are found, for instance, that Mallya didn’t pay taxes to cover for private travel, as it seems the promoters of Sintex are now accused of.

If there’s fraud, and Mallya perpetrated it, we have to prove it. "I am sure he did it" is not an answer. The accusations that Mallya is a Rajya Sabha MP and used his influence to limit cases is, after a point, not believable. Or that he used it to destroy Air India – that airline would have died even if people did normal business (it gets ridiculous benefits from the government/AAI, who have attempted to even out the game).  

The Fault of the Bankers

Bankers have supposedly demanded a personal guarantee from Vijay Mallya. And not just the public sector banks, this includes big private sector lenders as well. Why are they not invoking this guarantee? Why are they not seizing properties that he owns? After all, letting it linger any further will make Mallya sell his assets and take away the money, no?

I’m beginning to feel there is no personal guarantee at all. Certain assets that Mallya owns were mortgaged, like his house in Goa, or the office in Mumbai. But he’s not been personally held liable – it goes to show, even from the shareholding patterns of his companies, where none of his personal shares are pledged to a financial institution.

If there is a personal guarantee, we must blame the bankers for not invoking it. We must be seriously outraged that the banks – which include SBI, Bank of Baroda, Bank of India and IDBI bank among others – are not seizing and selling any assets that exist, a right they have through the SARFAESI act.

And was this not evident? Auditors have noted that KFA can’t really claim deferred taxes as an asset (which is near 4,000 crores!), and they have not provisioned for a tax claim where the primary ruling is against them (500 cr.). Further, some elements they call "loans" are essentially payments for leases where there is some dispute with the counterparty – money they can’t expect to come back. Given this the realizable net worth of the company is substantially below the loan balances banks have, which should have triggered alarm bells nearly a year ago.

We don’t see any outrage against bankers, and let us not have them get away with inane statements like "political influence". Bankers that take our deposits and whose shares we own are answerable to us, not only to their political bosses. We should even be furious with the RBI who have not come down heavily on the lack of legwork of the bankers.  

The Need for a Bankruptcy Law

India needs a corporate bankruptcy law. Corporates today can’t declare insolvency. There is no bankruptcy protection like there is in the US. A company can’t just die. If it owns a factory license and has lived for five years, it can apply to the Board of Industrial and Financial Reconstruction (BIFR). Or, any company can apply to get their debt restructured, a method that Kingfisher took in 2010 (when lenders converted some of their debt to shares at nearly 64 rupees per share)

But a company can’t demand protection from creditors. There is only "winding up" which means a full liquidation, and that is not desirable because it leaves a lot of things in limbo (distressed asset sales are usually at a big discount). A better option is to partially liquidate, and free the company from the rest of the debt, with enough to help it revive itself. This is how many US airlines have come back from what seemed like certain death.

Let’s look at what others have to say

Banks may oppose such a law because they will fear that everyone will just declare bankruptcy instead of paying back loans. However they should realize that the time and cost of an insolvency (sometimes upto 10 years) is a huge problem as it slows things down for everyone without any real hope for recovery of any money. The best thing would be to provide for a write-off of debt – after whatever can be recovered without completely killing the company. This may be subject to abuse but there needs to be proper investigation for any attempt to defraud banks by falsely declaring bankruptcy (including putting directors in jail). Followed up with proper enforcement.

The lack of a bankruptcy law now means that airport authorities are refusing to let plane leasing companies repossess their planes, on the pretext that KFA hasn’t paid up airport dues. This has then resulted in such plane leasing companies refusing to lease planes to other Indian companies. At least in a situation of insolvency, such liabilities become clear, even if disadvantageous to some.

Was Bad Management to blame?

Being a bad manager, or losing business, is not illegal. If you were to believe the kaipullai story, everything Mallya did was sinister, including breathing. But get this:

  • We all loved the TVs and the great service the airline gave us, for a fraction of what it used to cost. Salaries, fuel costs, airport charges etc. were all up, but these guys competed at the 1K-BLR-TO-BOM rates. To be the last man standing was perhaps the goal, but this strategy inevitably requires at least one man to not stand.
  • They have nearly no assets. They lease their airlines. They rent their offices. They have huge salary costs. This means there’s really nothing they own. So what, if anything, can banks own as collateral? Soft items like "landing rights" and "parking bays" are stuff that can easily go away. Contrary to popular thinking, they don’t own the Formula1 team or the football team or anything else (and didn’t pay for it either). They are technically insolvent, but we have seen "technically insolvent" being fixed with more liquidity – think of AIG or much of the US banking system.
  • Asking money from SBI doesn’t mean he’s stealing taxpayer money. Even a debt restructure, with a partial write-off, is not stealing. This happens all the time, and I’m sure the sum total of other write-offs – including businessmen, personal loans and other stuff – will substantially outnumber anything Mallya has done. Yet, this is not stealing. (Unless it’s something called a "wilful" default – that is, not repaying when you really can. Kingfisher doesn’t qualify)
  • Costs were too high to even meet revenues. If you’re going to be all uppity about that, please also note that the Bansals of Flipkart are going through this
    right now. Don’t give me jazz that they’re not the same thing – everyone’s flying on easily flowing money (equity or debt).
  • Only Air India’s mismanagement is responsible for the failure of Air India. Not Mallya or Kingfisher. If you hate their influence, please save your outrage for political bosses.
  • Did Mallya abuse his position as Kingfisher chief and use planes for personal use, or divert the money elsewhere? If so, let’s indict him for fraud. But as I’ve said earlier, I doubt this is a significant amount.

I’m sure if you investigate you will find both management mistakes and bad luck. But that’s not a big deal.

Channeling Outrage

We love our sound bites, but just because something fits well in a few characters, it doesn’t mean it is correct. Outraging against Mallya because he donated Gold is the wrong thing to do, and we should know better. To attempt to defend this outrage by saying "one should take responsibility for his actions" is hiding behind a weak understanding of how businesses need to work. Your company’s managers are simply that – managers. Unless you can prove fraud, it is outrageous to assume that your manager’s wealth belongs to the company.

Our outrage should be at the lack of a proper bankruptcy law, and at the lack of investigation and enforcement of existing laws.

This has been a long post. I’ve been writing for two days. But I don’t feel like copy editing it down to 1000 words. Because this requires a long, detailed rant. I repeat myself often and to some of you, this might sound disrespectful of your time and intelligence. For that I am sorry.

By the way, I do not support the donating of gold to any temple. It is, for the most part, a waste of good money, and I would be quite happy if the government introduced a temple-gold tax. But I also support the right of any human being to do something that is not illegal, however stupid it might seem.

So let Mallya donate his gold, and let’s focus on changing the playing field.


Like our content? Join Capitalmind Premium.

  • Equity, fixed income, macro and personal finance research
  • Model equity and fixed-income portfolios
  • Exclusive apps, tutorials, and member community
Subscribe Now Or start with a free-trial