On Tuesday, Kingfisher Airlines announced a Rs 468.66 crore loss for the second quarter of 2011-12. It is well-known that the company is in trouble. Last week, it cancelled 200 flights; it has never made a profit in the six years of its existence and it owes one big pot of money to Indian banks. On Tuesday, its chairman Vijay Mallya said he wanted “working capital” from banks.
Today, 13 banks are part-owners and lenders of the company. This is a clear conflict of interest situation. Should their first priority be to recover their money—what they should do as banks? Or should it be to promote the interests of the company—what they should do as owners?
There is no simple answer here. If they lend, say Rs 800 crore more—as Mallya wants—then their exposure will rise to approximately Rs 8,500 crore. This will not help the company and will certainly hurt the banks’ interests.
This situation could have been avoided when the banks converted part of what they had lent Kingfisher into equity.
Instead of the 23.4% they hold now, if they had acquired 26%, they could have insisted on a management change and placed the airline in competent hands, resolving the dilemma they now face. They and the Union government have to answer the question why this was not done. In the meantime, the value of their holding has eroded by 65.6% from the price at which they had acquired it. On a mark-to-market basis, these banks have lost Rs 489 crore since March on this count. While shareholder approval is not required for such deals, it is unfair to shareholders nonetheless: the banks certainly owe an explanation.
The blame for this mess has to be shouldered by the Reserve Bank of India (RBI) and the Union government. RBI should not have allowed banks to proceed with the loans-into-equity deal.
Today, however, the Union government is up to something far more insidious. It has given an in-principle agreement to foreign direct investment (FDI) in the aviation sector.
This is a decision that has come just in time for Kingfisher to make the most of it. Why was the decision not taken earlier and why only now?
That is not all. If in the days ahead, the banks do agree to lend more to Kingfisher, clearly it will be with the full knowledge of the government. Kingfisher also wants to import aviation turbine fuel (ATF) directly, bypassing the state-owned oil companies.
If these three decisions— FDI, working capital from banks and direct import of ATF—are made in accordance with what Kingfisher wants, it will amount to a bailout through the back door. For in no other country, where free market principles exist along with sound regulation, would this be permitted.
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