Needed: An exit policy for bad businessmen

Vijay Mallya has not paid employees of Kingfisher Airlines for months, and has defaulted on thousands of crores due to suppliers and creditors. Yet he has just donated three kilos of gold, worth almost one crore, to the Tirupathi temple. In August, he offered 80-kilo gold plated doors to the Kukke Subramanya temple in Karnataka. Possibly he believes that the gods can be bought off in ways that employees and creditors cannot.

How can a man who owes enormous sums to employees and creditors be free to throw gold around like small change? If there were any justice, surely the gold and golden doors should be seized from the temples and handed over to the employees and creditors. Surely they should have first right to Mallya’s assets.

After two decades of economic reform, we have not yet evolved rules that facilitate the exit of poor managements before they ruin a company beyond redemption. Kingfisher Airlines has been ground to the dust by Mallya, a liquor baron who should never have entered this space.

A free-market economy is not just a device giving owners the freedom to sack employees. It is one where creditors and employees have the right to seize a company defaulting on dues, and sack the management. The managing shareholder or promoter is only one of many stakeholders. If he cannot meet his obligations to other stakeholders, they should oust him in a true free market economy. In India, alas, our unreformed regulations and procedures leave promoters in control no matter how big a mess they make.

In the US, creditors can quickly seize a company that defaults on dues, and reorganize or sell it to a new owner. The owner can get temporary protection from creditors through Chapter 11 proceedings. In this, a judge determines whether the company is so far gone that it must be liquidated, or whether it can be saved through mutual sacrifices by creditors, employees and owners. In the process, the judge can change the owner. So, often workers survive bankruptcy proceedings, but the owner does not. That is what we should aim for in India too: an exit policy for incompetent, defaulting owners.

Kingfisher Airlines never made a profit, not even in the boom years when its rival airlines were profitable. Creditors should have moved in years ago when it became clear that the skills of a liquor baron were irrelevant for an airline. But in India creditors cannot quickly seize a company, least of all when the owner has political clout (as in Mallya’s case).

In the old licence permit raj, banks and financial institutions had to support existing managements and keep rescuing them. This has not changed despite the 1991 reforms. Banks have to keep throwing good money after bad.

Today Kingfisher is so worthless that it no longer makes sense to seize it and find a buyer. SBI Chairman Pratip Chaudhuri estimates that rehabilitating Kingfisher will cost a billion dollars. Nobody will do so — a new airline can be started for maybe just $100 million. Kingfisher has just lost its flying licence. Mallya’s hopes of being rescued by Etihad Airways of Abu Dhabi look like pure fantasy.

Even if it makes no sense to seize the airline today, why not seize his liquor business? Why not seize his prize luxury possessions, ranging from paintings to yachts or jets? Why not take over his cricket team, Royal Challengers? Why not take over his football team Mohun Bagan, and his Formula 1 racing team Force India? Why is he allowed to keep all these, along with gold that he donates to temples, when he says he doesn’t have enough to pay employees or suppliers? He has given personal guarantees to banks: why are these not being enforced?

Mallya can be congratulated on one thing. Service was top-class in Kingfisher , and the airline gained a good reputation for quality. Had the airline been seized early on, it could definitely have been sold to a new owner. However, its reputation has steadily fallen with its continuing financial crisis, leading to cancelled flights and official grounding.

I constantly hear that India has gone in for neo-liberal policies. That’s pure rubbish. Neo-liberalism would have given employees and creditors the right to quickly seize and sell a company that cannot meet its obligations. The problem is not liberalism but the continuing old illiberalism that keeps promoters in charge, forcing other stakeholders to take a hit. Temples and religious trusts can keep enormous donations from defaulters instead of handing them over to others who, in all justice, should have the first right to such money or gold. This area desperately needs reform.

4 thoughts on “Needed: An exit policy for bad businessmen”

  1. Very true sir. But I wonder why the regulatory authorities are not taking the things like this into consideration to safegaurd the interests of various stakeholders. Is it their inability or helplessness to wipe this menace in the sector??

  2. What you are suggesting requires a very informed set of people willing to exercise their rights and a system that allows the rule of “fair” laws. I doubt that enactment of these laws alone will change anything (because businessmen with cozy links to politicians will get around the laws). The details of the spectrum case have shown the de-facto practices being followed in auctions… and no one should be naive enough to think that those were one off cases. Banks don’t seize property, in spite of personal guaranty, only for people who are connected. If I took a loan of 1 lakh and could not pay, bank would harrass me and seize property….till I showed proof that I know someone who knows someone who is well connected. Sadly that is the current state of India. But I guess you are still “young enough to think that you can change the world”. More power to you!

  3. A very good article indeed. But there is a prerequisite for the implementation of the suggestion. It can be done in a democracy with independent and willing-to-serve politicians. it is an eyewash to say India is a democracy. It is a plutocracy. Our politicians act as per the will of Tatas and Ambanis. Remember how MMS waived off Rs.7000 crore penalty imposed on RIL for their default in KG basin.
    History and Numerous election have also revealed that the Indian public wants their leader to show his strength. A politician not abusing his powers is considered incompetent. e.g Mayawati/Mulayam in UP, despite so many cases of Huge corruption, the congress managed to win by clear majority in HP. this is really disgusting. The public here is just too ignorant. I am sure the congress, which has also redefined the unit of corruption to Lakh crores, will not do much badly in 2014 general elections.

  4. corrigendum: I did not mean that Mayawati/Mulayam are not abusing their powers. Insteat I wanted to say that they are the pioneers of it and still keep winning alternately.

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