Home / Opinion / Vijay Mallya, you can’t have your cake and eat it too

I was amused to read Vijay Mallya’s recent statement wherein he puts forward his point of view on the current debate on corporate debt and raises the question of limited liability of shareholders in limited companies versus the promoter’s personal liability in repaying debts raised in the company’s books. He argues forcefully about rule of law and the hysterical attack on his “reputation" by a section of the media.

But this whole thing is about reputation, is it not Mr. Mallya? And reputation is not built by publishing calendars featuring models dressed in swimsuits and paid media coverage of a high society (whatever that means!) page 3 lifestyle funded by public money. It is built brick by brick and is a direct consequence of the prudent practices a promoter follows when using public money entrusted to him in a publicly traded company, the decisions he takes to generate consistent shareholder returns, the way he treats his employees in times of crisis and how he fulfils his statutory obligations to the government. Above all, the accountability he takes for the decisions he has made in a fiduciary capacity.

He just has to look over his shoulder at his fellow promoters like N.R. Narayana Murthy and Azim Premji, among others in his home city of Bengaluru, to know what building such companies and reputation is all about.

T.V. Mohandas Pai and I were interviewed in great detail, separately, on 29 September 2014 by Mint with respect to certain disclosures and questionable accounting practices which had surfaced in the financial statements of United Spirits Ltd (USL) post the Diageo transaction.

It is a matter of public record that it was pretty apparent to us and many others that funds had been siphoned from USL to fund Kingfisher, UB Holdings was used as a conduit for raising loans and laundering them to his group entities, inter-corporate loans were given to related parties without board approval, accounts were improperly stated, audits were stage-managed, etc during the period Mallya was in charge of USL. It is also publicly known for many years that tax deducted at source was not deposited with the revenue department and provident fund (PF) deductions and contributions not deposited with the authorities.

Despite the stringent penal provisions under the Income Tax Act and PF Act, this practice continued over time for many months and no one was either arrested or criminally prosecuted as mandated under law. Such was the influence of the honourable Rajya Sabha member with the government of the day prior to the current regime.

Governance failure is at the core of the rot which ails our public life and it is weak corporate governance in promoter-driven companies which makes large conglomerates willing participants in this fraudulent system. Having worked for many years as a chief financial officer (CFO) and a shareholder nominee with companies and boards run by various shades of promoters, my experience suggests that despite the tougher legislative framework to tackle the menace of “making merry with funds provided by the mute minority stakeholder", governance standards in listed companies directly reflects the mindset of the promoter.

This is primarily because very few board members are truly independent, as are even fewer key management personnel such as the CFO and company secretary. The few that indeed have the courage of conviction to not comply with the dubious practices at the behest of such promoters are ultimately forced to quit or voluntarily leave. In the case of Mallya, the CFOs must share a large degree of responsibility for continuing in the organization and approving transactions which were plainly designed to beat the intent of the law if not the law itself. Inter-corporate loans to related parties on very generous terms, appropriating amounts due to the listed entity towards other loss-making group entities by sham transactions through a conduit holding company, pledging assets of the listed company to securitize loans to another bankrupt group company without board approval, etc are only some of the examples highlighted by auditors.

Furthermore, the norms for CEO/CFO certification of the financial statements under clause 49 of the listing agreements are onerous responsibilities which these two key managerial personnel cannot abdicate.

And Mallya, after twisting every rule in the book, is now justifying the selective use of some sections of the same Companies Act which suit him to underline the distinction between his personal assets and assets and liabilities of his group companies. Howsoever bizarre, loopholes in the legal system do allow him to do that but that hardly counts towards building reputation!

Neither is reputation built by the fact that personal guarantees given by him towards these loans have not yet been honoured despite the substantial resources still available with his holding company, United Breweries (Holdings) Ltd. Or by surreptitiously disappearing from the country.

The courts will have a final say in the matter as, in my view, this is a fit case for “lifting the corporate veil"— a rarely used power given to the courts.

It is supremely ironic that of the 7,000 crore debt due to the public sector banks, most were given from 2009 onwards. Ironic, because in February 2009, I had written an article in Business Today titled More Satyams would continue to happen, where I had argued that despite the steps taken by the United Progressive Alliance (UPA) in its first term to resolve the unfolding Satyam crisis quickly, deeply entrenched interests and systemic corruption would prevent any cleansing of the system even after such a high profile fraud.

It was my belief that UPA-I was forced to act only because of the impending elections two months down the line. It is a matter of record now that UPA-II, which came to power soon after, oversaw what can arguably be termed as the most corrupt period of organized loot by the political system in Indian history, of which Mallya was only one beneficiary. I had further argued that lack of political will and resolve to clean up the system will ensure that more mega corporate frauds will continue in India, unlike in the US where political will and clarity of purpose demonstrated by all law enforcement agencies during the Enron, Tyco, WorldCom scandals to speedily mete out exemplary standards of justice to the high and mighty involved in those scams in the early 2000s has ensured no recurrence whatsoever of such crimes in corporate America.

The only difference this time which gives me reason to be hopeful is that we have a government headed by a Prime Minister who has demonstrated the political will to cleanse the system of its corruption and, as I had indicated in one of my earlier articles this year, Indian promoters who have defrauded the system through cozy networks with politicians, bureaucrats and bankers will feel the heat as they never have in independent India. He is fighting a lonely battle though, and I hope he is allowed to stay the course. Definitive action against Vijay Mallya will prove whether my hope is vindicated or is utopian—and whether we are failed once again by the political class.

The writer, a Sloan Fellow from the London Business School and a chartered accountant, currently manages a private equity fund.

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