This is a question that bothers all – the civil aviation ministry, the regulators, the passengers, the lenders, the employees, the vendors, the shareholders and the promoters of the beleaguered airline.
Liquidation is a word unheard of in India, and Kingfisher Airlines is almost treated as a public good. This is not the first time an airline has been floundering. As recently as 29 November, AMR Corp., which runs American Airlines, filed for bankruptcy in the US. However, different countries have different definitions of bankruptcy. In any good credit environment, lenders enforce collateral and take over the companies. As in the case of AMR, stock prices head lower and the wealth of shareholders is wiped out.
As of today, Kingfisher’s market capitalization stands at Rs1,450 crore and the share trades at around Rs25. Obviously, equity investors believe that their wealth will be preserved and that banks will again be the fall guys. With debt of over Rs7,000 crore and convertibles of over Rs1,000 crore, the enterprise value is over Rs9,500 crore.
At Kingfisher, clearly the current board and independent directors have failed in their duties. So, it is for the shareholders to act. Where are the true owners of Kingfisher and what are they doing?
A suggested course correction is:
•• All stakeholders should realize that passenger convenience and safety should be paramount. Public and investor scrutiny is very high and the government and lenders should be less tolerant. Banks should not throw good money after bad under the same board and management. Good corporate governance and good business sense should prevail at the banks.
•• More than 90% of the shareholding of the promoters is pledged to lenders. The banking consortium of State Bank of India, ICICI Bank Ltd, IDBI Bank Ltd, Bank of India, UCO Bank and Punjab National Bank should unilaterally exercise the pledge, after which they will own more than 75% of the equity of the airline. Apart from term loans, the capital structure also consists of 7.5% cumulatively redeemable preference shares and 8% optionally convertible debentures, which presumably are also pledged, and on exercise, would only increase the equity holding of the banking consortium.
•• The enforcement of collateral by banks would likely drive the wealth of existing shareholders – including some of the banking consortium’s own equity holding in Kingfisher -- to near zero.
•• Subsequently, bankers should call for an extraordinary general meeting where they place resolutions to remove existing directors and appoint new directors with experience and bring different perspective to the process. As the banking consortium will own more than 75% voting rights, they can table and pass any resolution.
•• The new, reconstituted board should bring in new management.
The new board should then recapitalize the airline by bringing in other investors as an equity partner and seeking newer additional term loans for the airline. Private equity players, other investors and business groups would be keen to buy into a Kingfisher airline franchisee. Similar instances of recapitalization were possible at Vishal Retail and Centurion Bank.
•• Under institutional or new owners and a new professional management, bold thinking in terms of inviting pilots, employees and vendors as part shareholders may work.
•• This recapitalization and restructuring exercise would bring in newer shareholders, fresh management and a new focus to the airline. Having been pushed to the wall, banks wouldn’t have to suffer the loss unilaterally.
Will banks bite the bullet and set a precedent in corporate India?
Shriram Subramanian is the managing director of InGovern Research Services Pvt Ltd