08/06/2016
VIJAY MALLYA – A VILLAIN OR A VICTIM OF CIRCUMSTANCES
[2016] 132 CLA (Mag.) 7
Purti Marwaha Gupta*
The following article sets out the problem of Kingfisher Airlines, and its comparison with Air India. The article further explores the possible solutions within the present corporate Insolvency laws and the effects of Bankruptcy Code.
INTRODUCTION
Vijay Mallya had once been one of the most talked about and prominent business personalities of India. He was being considered as one of the star entrepreneurs of the Indian industrial growth. However, the past few days has seen him being reflected as a negative character, an absconder having left the country, a wilful defaulter and a contributor to the non-performing assets in India. However, the adverse adjectives being added to a once highly successful entrepreneur only reflects the sorry state of affairs of Indian industrial saga. Do we really think or do we really want to believe that Vijay Mallya, who had contributed immensely to the Indian Industry, a person who had contributed to the exchequer, a person who had contributed in making payments of interests to the Banks, a person who had provided employment to a large number of people, a person who had been an inspiration to the great Indian industrialists of the day, a person, who had successfully operated huge industries like UB group, had acquired and successfully run huge and diversified businesses all across and had succeeded in building a multi-national conglomerate of around five dozen Companies.
LOSSES TO KINGFISHER AIRLINES – INDIAN ECONOMIC AND CORPORATE STRUCTURE
The losses suffered on account of Kingfisher Airlines, which was acquired by him in the year 2005, has put a negative mark on him and has given him a dark image by the Indian media and is also being spoken negatively by the people all across, while forgetting his positive contribution. In order to understand the losses being incurred by Mr. Vijay Mallya in his business dealings, which has now given him a negative name, we need to understand the current status of the Indian economy, which over the period of last few decades have seen industries going down the drain and the famous industrialists of their times being constrained to close down entities, which may have suffered technically or economically but primarily on account of the financial constraints of the Indian economy, which is stuck in a vicious circle.
Growth of Indian economy
As we all understand, prior to the Indian independence, the Indian economy had been largely agrarian. Post-independence, India witnessed a change in the mindset of the people, a change in the thought-process that India needs to have an industrial character as well if it has to grow a long way or go a long way. In this particular conspectus, the leaders of Indian independence took steps to make Indian Industry a success. The growth in the industrial sector only came in the past few decades post-independence and a further transition post-liberalisation in the year 1991. What is essential and what our economists indeed understood was that the Indian economy had to walk a path towards the success of its industry, which forms the basis of the industrial, social and economy growth of any country on a longer run. However, unfortunately, the thought-process could not be transmitted into reality. The Indian economy as it exists as on date even after its liberalization, which took place some 25 years back in the year 1991 suffers from lot of difficulties. There are challenges of heavy interest rates, which are existing as on date when any entrepreneur for that matter takes loans from the bankers. There is huge levy of taxation, which is there on the existing Indian economy. There is also a larger pressure because the cheaper economies like China are able to provide or so to state dump its products at peanut prices, which leads to the Indian economy get non-compete.
Growth of corporate and insolvency laws
In the existing structures, it is obvious that the Indian economy needed to provide better industrial laws. Of course, an attempt was made in the year 1985 to bring in the Sick Industrial Companies(Special Provisions) Act, 1985 (‘SICA’), which came into effect in the year 1987. However, SICA was confined only to the revival of the sick industrial companies through the statutory bodies, namely, Board for Industrial and Financial Reconstruction (BIFR) and Appellate Authority for Industrial and Financial Reconstruction (AAIFR), which in effect means only those industries which came within the ambit of the Industrial Development Regulation Act, 1951 (‘IDRA’) and no other Company for that purpose. Anyhow, the Act was to some extent successful but lack of infrastructure and certain flaws (which could be easily corrected with minor modifications) led to it being not successful in ensuring rehabilitation of distressed entities. However, in quick succession of SICA, while not introducing minor requisite modifications in the provisions of the said Act, there came in Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (‘RDDB Act’) for recoveries by Banks and financial institutions through Debt Recovery Tribunal (‘DRT’) and its appellate tribunal being Debt Recovery Appellate Tribunal (‘DRAT’). After a decade or so, the provisions of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 for recoveries of the securities without interface of any court or tribunal.
Simultaneously, steps were being mooted to repeal SICA and the Companies (Amendment) Act, 2002 was passed, which was coupled with the SICA Repeal Act, 2003. The said Acts for repeal of SICA and the Companies (Amendment) Act could not, however, be notified. Indeed, it is a story of the past since despite passage of 13 years after the passing of Repeal Act, SICA continues but in a crippled state. However, the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, (‘SARFAESI’) and RDDB Act acted as a road blockage to the promoters, who actually wanted to revive their entities because the armor provided by SARFAESI was being used and abused against the entities and that was leading to a situation where people were compelled to close down their businesses at the whims and fancies of the vested interests especially Asset Reconstruction Companies in the country. Now, the Companies Act, 2013 has been brought into force. There is a possibility that the Chapter XIX in the Companies Act 2013 may be notified in the near future and/ or alternatively a more disastrous enactment in the nature of Bankruptcy Code might be introduced. The story of the legislature in bringing the changes is to come in line with the western world. However, quite amazingly, they are not able to realize the basic core issue that the Indian industry is still at its kindergarten stage and an attempt is being made to force the Indian industry to sit in the exams of post-graduation by forcing them to compete with the Corporate Laws of the western world.
In short, the non-introduction of the suitable amendments in the existing enactments dealing with corporate insolvency and burdening the Indian corporate with huge debts on account of high interest rates and the Government policy and board room decisions of the Government of bringing thoughtless draconian legislations has resulted in the lackluster performance of Indian industry and the huge mounting non-performing assets.
KINGFISHER AIRLINES - INDIAN BANKING SECTOR AND THE CURIOUS CASE OF AIR INDIA
Vijay Mallya and his dream project of Kingfisher Airlines had also suffered mainly on account of the Indian government policy and the manner in which the banking sector in India is operating. Kingfisher, for instance, was an international level Airline. The people all across enjoyed travelling in such a world class airlines. The people also wanted to be associated with such an Airline The problem, however, was pricing of oil, competition in the airline business and the general problem of recession, which was being faced by the Airlines Industry coupled with the fact that Mr. Mallya had a vision of providing a world class Airlines, which had caused huge default. The problem in Kingfisher is also to be seen in light of market situation created by the Government. The Central Government controls Air India, which is suffering its massive losses, reportedly the said losses are Rs.30,000 crore. As the taxpayer to the Government, i.e., the tax-payer continues to bear this burden that means that the Air India continues to fly and keep the airfares low thereby putting financial burden and causing financial distress on other private Airlines like Kingfisher. It is indeed an open secret that the huge losses of Air India with continuous lower pricing because of Government backing led to the operational unviability of Kingfisher Airlines since it was also constrained to keep its pricing low. Furthermore, the Government Policy of 5/20, i.e., the requirement to fly 5/20 Aircraft over a period of 5 years prior permitting Indian Airlines to fly abroad again put financial pressure on Kingfisher Airlines and it was forced perhaps to take over Deccan Airlines at an artificially inflated prices. Moreover, the distortion of the market created by Jet Etihad deal is well recorded and is in public domain. As such, the Government cannot wish away its own Policies, which have led to the collapse of Kingfisher. It must be remembered that Kingfisher is not the first Airline, which has failed. Other Airlines like erstwhile North-East Airlines, Jettison Airline has also failed due to financial problems.
SICA AND KINGFISHER AIRLINES
Simultaneously, the insolvency law of India SICA did not permit Kingfisher Airlines to come within its ambit for the very reason that as far as the definition of SICA was concerned, it was exclusively driven with the Schedule-I of Industrial Development Regulation Act. Accordingly, the Kingfisher Airlines in absence of the helping hand but coupled with huge mounting interest burden and draconian laws like SARFAESI prevented the settlement of dues and regaining of financial and operational viability by the said Airlines. The repercussions in it saw the mounting non-performing assets, closure of once a highly esteemed Airlines, non-settlement of the dues of the government and financial institutions and non-payment of the dues of the workers and employees. The offshoot of the closure and the business downfall, which was noticed in the Kingfisher Airlines had its impact on the entire structure and the business of Mr. Mallya and there happened to be huge defaults coupled with Mr. Mallya being lamented as a wilful defaulter.
SARFAESI versus settlement policies
Today, when people say that he owes thousands of crores to the banks and that Mr. Mallya is an absconder, the question which is to be asked from these banks and financial institutions is that what is the exact amount of interest, which was paid by him in the past for various industries being operated by him, the amount of revenue which was contributed by Mr. Mallya to the government revenue. It is simultaneously to be looked into that if the draconian law like SARFAESI was not in existence and if the settlement policies and guidelines were friendlier, had the debts of the banks and institutions not seen the resolution of the day.
Kingfisher Airlines and unemployment : Is Bankruptcy Code a solution or draconian law ?
It is also to be noticed and seen that what is the level of employment and to how many people, did Mr. Mallya provide the employment? Of course, one cannot be overlooking factor that there was unemployment situation created because of the closure of Kingfisher Airlines. But what is to be necessarily seen is that if the further draconian Acts like the Bankruptcy Code comes into play, it will be a routine thing to see the reckless termination of employment coupled with extremely low level immunity being available to the employees of the Companies. The hue and cry which is being made regarding the unemployment being caused by Mr. Mallya because of the operational unviability of Kingfisher Airlines will rather be a recurring phenomenon to our country, which has not even seen an industrial stability and whose real endevaour ought to have to a national industrial growth. In the given conspectus, what has to be essentially seen is that whether Mr. Vijay Mallya is a villain or a victim of the circumstances. He is indeed the victim of circumstances. He is indeed the victim of the fact that he did not get the hand-holding of the Government or for that matter, the Indian Banking Sector when he got heavily indebted for the purpose of preventing the downfall of the industry.
There are huge amount of taxation and pricing which our industrialists pay but are expected to endow on themselves the corporate social responsibility. In such situations, it has to be seen that whether those businessmen can be lamented as villains, when they get entrapped due to operational unviability. Whether such situations will bring the league of people like Mr. Mallya in the category of Wilful Defaulter? Whether he willingly defaulted, whether he willingly siphoned away the funds of the Government or for that matter, the default in performance of the Government in providing congenial insolvency laws and competing interest rates as available in the West has caused the situation of default. Mr Mallya as a matter of fact had infused thousands of crores as promoters contribution in his dream projects. Certainly, such entrepreneurs cannot be lamented as escapists and defaulters since they have largely contributed to the public exchequer, the business of this country and has also contributed as an inspirational source to 100s of entrepreneurs of this particular country. We have to thus understand and appreciate the fundamental flaws of the existing Indian economy and the existing laws and take correctional steps.
There is certainly a requirement to come out for the Indian government and politics to come out of the clutches of board room thoughtless and hostile legislations in introducing innovative growth oriented legislations. The Indian economy is not matured enough to see the perishing of the industry. We have to see how we can facilitate the revival. We are bound to see as to whether Vijay Mallya or people like him, whose industry is suffering on account of economic situation of this country are being put to docks. Indian structure needs to take corrective measures rather than putting entrepreneurs like Vijay Mallya in negative facet. Action on the assets of Vijay Mallya, which are being taken by bankers through the SARFAESI Act, if it was not the SARFAESI Act, could have been utilised in productive and timely realization of debts in a more structured manner. It seems that Vijay Mallya has taken an easy way out to UK but having said this, he had only been pleading for a reasonable settlement with the banks and financial institutions. Due to media scare created by TV Channels, there does not seem to be any possibility of a reasonable negotiable settlement between the banks and Vijay Mallya. This type of witch-hunting of Indian businessman would be detrimental to Indian economic interest in the long run.
Both United Breweries Ltd. and United Spirits Ltd. are going into foreign hands, which will be detrimental to Indian economic and security interest in the long run since liquor companies have disproportionate power on the social/traditional media due to their advertisement budgets and well-known capacity to influence politicians and people who matter. Placing such power into the hands of foreign conglomerate is ill-advised but it seems that the ‘globalization’ is the new Mantra for all ills and being Indian is a distressful word. While there is no gainsaying that if Vijay Mallya took a business risk, he must pay for it but simultaneously, an endeavour should be made that a systematic negotiating settlement is reached between Kingfisher Airlines and the Banks as also the control of United Breweries Ltd. and United Spirits Ltd. should remain with Indian entrepreneurs even if they are sold to new owners.
POSSIBLE OUTCOMES
We must remember that when we are mentioning people like Vijay Mallya, we need to understand that when there is any business house adding value to the Indian Industry, providing employment to the people and ensuring growth of the Indian structure, gets entangled into a mess of any structure, he has to be given the required aid. For instance, if the provisions of SICA were to apply to the Airlines bringing the Aircrafts from abroad and running an industry and if there were proper infrastructure in place, a rehabilitation package could have been evolved coupled with possible employment to its employees. In nutshell, we have to see as to whether entrepreneurs are to be faulted for the flaws of the Government. The answer is definitely in negative. We have to introspect, we have to examine and we have to see that where the provisions of SICA have failed, where the provisions of SARFAESI and other recovery Acts have failed, whether the provisions of the upcoming Bankruptcy Code or for that matter, Chapter XIX, if it is notified, are further death trapping to the Indian industry which even otherwise is not above to compete because of the inherent flaws and lack of vision of the government, which is required to mobilise its competing ability with the world.
There has to be a complete re-visit of our thought-processes rather than the mechanical working in the society. That is what is required for the growth, subsistence, and existence and flourishing of the Indian economy. If our structures get properly placed, if we are able to appreciate the flaws, which are causing concerns to the Indian economy, then certainly the non-performing assets of this country are not going to mount but are going to get substantially scaled down. That will lead to ultimate growth if our politicians wake up and if the people in general understand where the flaws emanate and we are not to lament someone as a wilful defaulter or a negative person simply because of the situational factors. We need to provide a proper growth-oriented economy and not a bankrupt economy, which is being contemplated through the SARFAESI and the Bankruptcy Code, if it comes into existence. We have to understand that we have to provide proper infrastructure to our judicial and quasi-judicial authorities and a friendlier industrial subsisting economy. The provisions of SICA if it is continued to exist, to be properly implemented in a wider framework with proper infrastructure and suitable amendments. We have to understand that we need the growth of the industry, we do not need the closure of the industry. If we permit the closure of the industry, we will again be entering into a colonial regime with western control on Indian indigenous domestic industry, that is not something which we are aiming at. We, the Indians have to understand that India needs independence in its true sense and not artificial independence in which it is getting into. So, let us understand and let us examine the issues and while talking about Vijay Mallya, I personally feel if the bankers and the Government take a proactive role and understand that where the problems have occurred and if those particular problems are plugged in, then certainly there will be timely and expeditious holistic resolutions even as far as entities like Kingfisher are concerned and the entrepreneurs, who have contributed to the growth of the Indian structure are not written off.
FOOTNOTES
*Advocate, Specialising in Corporate Restructuring Laws of India
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