ACONSORTIUM of 17 banks led by SBI, ICICI and IDBI Bank has over time learnt how recovering soft loans given to a corporate in good times can prove to be a practically insurmountable challenge. And they have learnt this the hard way.
In March 2011, the consortium agreed to convert ` 1,300 crore of Kingfisher's debt into equity at a price of ` 64.48 per share. The price was calculated by the SEBI- mandated 6 month weighted average of the share price. It so happened that it was a significant premium over the share price of ` 40 at the time the debt was converted into equity. The share price has sunk to junk status ` 2.90 ( on Friday August 8, 2014) some three years later, exacerbating the losses suffered by the banks. Consider the cases of the three leading lenders. SBI's 2.8 crore shares, which were worth ` 182 crore, ICICI's 2.6 crore shares worth ` 169 crore and IDBI Bank's1.7 crore shares worth ` 109 crore are not even worth the paper they are printed on.
The six top banks forked out ` 598 crore at the time ( see box ' Exposed: What Kingfisher owes').
The banks suffered a double whammy because in addition to equity they have also financed Kingfisher Airlines through loans.
Their total exposure is around ` 7,500 crore. Constantly downgraded by global rating agencies for rising non- performing assets, it came to such a pass that banks were unwilling to put in any more money unless Mallya infused promoter equity. And the broke Mallya wasn't in any position to do that. Ergo, non- performing assets on the banking system books are humongous. At the same time, it needs to be said that Mallya himself infused substantial equity into the company, but it didn't prove enough. The balance sheet of Kingfisher shows that Mallya has put in substantial equity into the venture. Over the last six years, he infused personal equity of ` 3,593 crore in the airline, with banks that have committed ` 7,057 crore in loans. The equity- debt ratio was not unreasonable at that point in time — 1: 2. In the last 12 months alone of 2010- 11, Mallya put in ` 783 crore, of which ` 150 crore came in October 2011.
Mallya's desire to become the biggest airline mogul in India tripped him. His single minded focus to best Jet Airways and give the best possible service standards in the industry without so much as looking at the costs involved kept adding to his losses, till the balloon finally burst.
With the CBI filing the first preliminary enquiry on Saturday to probe the role of IDBI Bank management in giving a ` 950 crore loan to Mallya's KFA despite the airline having a negative net worth and negative credit rating, the first big domino may have fallen in the larger bribe- for- loan scam that has been recently unearthed by CBI. Syndicate Bank CMD S. K. Jain may well be the first trapped by the CBI, but the Kingfisher loan story could take this investigation to a whole new level.
Over the last year, banks pushed to the wall due to Mallya's growing intransigence started selling shares of United Spirits and Mangalore Chemicals and Fertilisers, given as collateral against the loan, and netted about ` 600 crore.
But that is where the buck stopped for them as the airline began challenging all the claims against it. In March 2013, the combative Mallya's UB group moved the Bombay High Court against the sale of shares, but secured no interim relief. Two months later, the bellicose lenders recalled the entire loan of about ` 6,000 crore, asking Mallya to return the entire amount at once.
Involved in an attritional war, the lenders and UB Group have battled over the possession of Kingfisher House in Mumbai and Kingfisher Villa in Goa. Since both properties were pledged as collateral against the loan, the lenders wanted to move in against them, but to no avail. Lenders, realising the degree of difficulty involved in recovering the bad loans, moved the Debt Recovery Tribunal ( DRT) Bangalore.
Stymied at every turn, the Karnataka HC, while hearing a winding- up petition against the airline, asked banks to maintain status quo with regard to the company's Mumbai office, while a local court in Goa, too, stayed banks' attempts to take possession of Mallya's villa in Goa.
THINGS have gone bad quickly, 2010 was when it was all hunky dory. In a controversial decision in November 2010, public sector banks restructured ` 7,650 crore of debt, converting a portion of it into preferential shares.
The banks announced a twoyear moratorium on the repayment, reduced interest and additional funding. After the restructuring, the airline's total debt fell to ` 6,300 crore. Compounding the agony, in March 2011, ` 750 crore of preferential shares issued to banks were converted into equity shares at ` 64.48 a share, a premium of 61 per cent. During that quarter, banks and other financial institutions held 23 per cent stake in the airline. A year later, when the lock- in period for shareholding ended, banks started selling shares at a loss, reducing their holding to 13 per cent.
Mallya always promised much more than he ever delivered, predicated as his persona was on his larger than life image.
The airline estimated the reduction in finance costs and tweaking the business model would lead to gains of ` 2,190 crore. It firmed up plans to hive off its ATR operations, loyalty programme and engineering unit into separate companies, none of which fructified. Despite a generous debt recast, the airline was unable to generate profits.
In fact, it didn't record profits in its seven years of operations. By March- end 2013, the airline's accumulated losses stood at a staggering ` 16,000 crore.