Why Vijay Mallya has landed at the bottom of the barrel

Minhaz Merchant
Minhaz MerchantMar 14, 2016 | 18:22

Why Vijay Mallya has landed at the bottom of the barrel

Television camera crews stationed outside Vijay Mallya's 30-acre Hertfordshire estate in the quiet English village of Tewin have a long wait ahead of them.

Mallya's country home, 40 miles outside London, hides a bittersweet truth: Mallya owns assets far in excess of what he owes 17 banks, more than 1,200 former employees of Kingfisher Airlines, the income-tax department and other creditors. Much of this math has been lost in the hype around Mallya's flight out of India one day before his creditor-banks moved the Supreme Court to impound his passport.


How much does Mallya owe? And how much are his assets worth?

Mallya's debt liability (principal plus interest) to 17 lender banks is just over Rs 9,000 crore. In addition, he owes around Rs 1,000 crore in unpaid employee wages, tax deducted at source (TDS), service tax and other dues. His total debt is therefore about Rs 10,000 crore.

Now to Mallya's assets. On TV debates, a lot of time is wasted discussing the value of his impounded jet, office premises, a villa in Goa, a home in south Mumbai's Nepean Sea Road and other pieces of commercial real estate. The total value of these assets is less than Rs 1,000 crore and will barely make a dent in Mallya's liabilities.

Mallya's real wealth lies in his shareholding in United Spirits Ltd (USL) and United Breweries Ltd (UBL). Both are blue-chip public companies listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

Mallya owns just under four per cent of USL (Diageo owns 55 per cent) and more than 32 per cent of UBL (Heineken owns just under 39 per cent). The market value of those holdings have doubled over the past year due to the multinational presence of Diageo and Heineken - and India's booming beer and spirits market. Mallya's wealth in these companies has also doubled in this period.


The value of Mallya's shareholding in USL is around Rs 2,400 crore at current market prices. The value of his shareholding in UBL is around Rs 6,700 crore, again at current market prices.

Some of Mallya's shares in these companies have been pledged to banks. That, along with the personal guarantee he has given those banks, makes it easier for lenders to sell pledged shares in the market. Pledged shares valued at Rs 1,244 crore have already been thus sold by creditor banks. Another Rs 1,250 crore lie in escrow accounts following Mallya's aggressive court action to stop the sale proceeds from those shares going to banks.

The non-pledged shares can also be sold once the Supreme Court compounds all proceedings in the Mallya case. These are stuck in various courts and tribunals across the country. Mallya has exploited India's slothful judicial system to his advantage.

Once all these court cases are brought under the single jurisdiction of the Supreme Court, banks, employees and other creditors (including the income-tax and service tax departments) have an excellent chance of getting their money back - all Rs 10,000 crore of it


Mallya is reportedly negotiating a settlement at around half this amount. He wants to pay the principal (about Rs 5,000 crore) but not the interest that has mounted over the past several years.

What is clear though is that Mallya's India-based assets in highly liquid blue-chip shares of USL and UBL run by international icons Diageo and Heineken cover his entire Rs 10,000 crore liability.

Foreign assets

But that's only half the story. Mallya owns a slew of businesses in Europe, America and the Middle East. Crucially, the non-compete agreement he signed with Diageo last month (for which he has already received a $40 million advance payment of the contracted $75 million) excludes Britain. In short, Mallya is free to start or run a liquor business in Britain any time he wants. He already owns Kingfisher Beer Europe Ltd.

The value of his other assets abroad (including several in the United States such as Mondocino Brewing Company Inc in California) are hard to quantify. He has lost control to Diageo of his Formula1 team and Royal Challengers Bangalore IPL franchise, but retains several other foreign assets - brewing companies, real estate, island resorts, race horses and yachts.

Back of the envelope calculations show that even if Mallya pays up the entire Rs 10,000 crore he owes his Indian creditors from his USL and UBL shareholding, he will still have a net worth of between Rs 8,000 and Rs 10,000 crore in assets abroad. By doing the right thing by his former Indian employees and lenders, Mallya's wealth will decline from an estimated current Rs 18,000 crore to Rs 8,000 crore. That will still leave him a dollar billionaire.

Money therefore is the least of Mallya's current problems. It is his cussedness in not doing the right thing - despite having the resources to do so - that stands out. He has been insensitive to his former employees by holding up their wages. The arrears in most cases are more than 12 months of salaries. One former employee has committed suicide. Several others have lost their homes, savings and gold.

Mallya ran up most of his debt between 2008 and 2013 during the go-go days of the UPA government. In 2010, an event occurred that led to what might suggest collusion between senior bank officials and Mallya.

As Subhomoy Bhattacharjee reported in Business Standard on March 11, 2016:

"It was an innocuous change of policy by the finance ministry in 2010 which allowed Vijay Mallya and several others to tap public sector banks for additional loans, riding on often weak credit appraisals. The finance ministry that year told its officers who were nominated on the boards of public sector banks to stay away from the board sub-committees tasked with examining big-ticket loans. The nominee directors were instead supposed to give their opinion on systemic and other macro issues concerning the banks. A few months later, Vijay Mallya applied for a sizable credit from the state-owned IDBI Bank and that was approved for about Rs 900 crore. As soon as the finance ministry made the decision, the Reserve Bank of India (RBI) also asked its nominee director to step back. The boards of state-run banks are populated, among others, by two nominee directors from the finance ministry and the RBI. The former is supposed to represent the interests of the government as the largest shareholder in the bank and the latter is expected to be an eye for the regulator in the boardroom. The decision to withdraw the officers from the inspection of individual credit decisions of the banks happened just before the banks in 2010 and 2011 began a massive credit drive for the infrastructure sector. Like Mallya's loan, which has turned non-performing, plenty of those loans given out from the period now sit on the books as bad ones."

While the UPA bears the principal responsibility for allowing banks to lend copiously (and possibly collusively) to Mallya's failing airline in 2010-14, the NDA government has been remiss too. The CBI, ED and DRI did not act on their notices to Mallya for several months.

In the end, it is this laxity that allowed Mallya, unfettered by any court warrant, to leave India legally on March 2.

Finance minister Arun Jaitley (who oversees the ED, I-T department and DRI) and home minister Rajnath Singh (who oversees the CBI) must share responsibility for these leaden-footed agencies.

The ED has summoned Mallya to appear before it on Friday, March 18. He is unlikely to do so and instead will seek an extension citing business meetings in London. The Supreme Court has issued Mallya a notice for a hearing on March 30. Mallya may not attend that in person either and ask for personal exemption through his battery of lawyers.

Meanwhile, a Hyderabad court has issued a non-bailable warrant against Mallya and Kingfisher's CFO returnable on April 13. The Serious Fraud Investigation Office (SFIO) and SEBI have launched their own investigations into Mallya's businesses, including the criminal charge of money laundering.

Mallya's confidence, however, stems from the fact that, when push comes to shove, he has assets far in excess of what he owes. India's tortoise-like judicial system is an ally. He intends to eventually pay up, but like a small shopkeeper is trying to minimise how much he must pay and when.

Money buys a lot of things. The one thing it does not buy is ethics.

Last updated: March 16, 2016 | 11:34
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