Sky High Crucifixion

Vijay Mallya’s public crucifixion reached a new high on April 7 2016 when 17 lending banks declined to accept his settlement offer, putting the Supreme Court in the unenviable position of asking him to make a full disclose of all assets held by him, his wife, and his children too. This comes in the backdrop of a relentless campaign to demonise the man who only yesterday was the Indian male glam-doll of choice, carrying our flag to the sort of snooty places that host F1 races. Since I lost all of 265,000 frequent flyer miles earned on my American Express card when Kingfisher Airlines ceased operating in October 2012, I would happily support the smear campaign but for the fact that my loss is trivial in the face of the hundreds of crores he lost.

That is also true for most other people bad mouthing Mallya. They blame him for losing the money. The idea that all businesses by definition carry “no fault” risk seemed alien to most people. Where do we get this idea that all businesses must by definition make money all the time? What is it exactly that Mallya is accused of? For the most, I hear that Mallya has no right to live his luxurious life when he owes hundreds of crores to banks. For anyone born less than 400 years back, that is indeed a very strange notion. The rise of oceanic trade between Europe on the one hand and both America and Asia on the other created a curious problem: about 25 per cent of all ships that plied the oceans were lost at sea to weather or pirates. To manage and distribute this risk, the Dutch and the English between themselves invented the joint stock company. This allowed individuals to buy a share of the risk (and the reward) of these perilous sea journeys. Laws were created to facilitate this risk sharing. These played a leading part in spurring the first wave of globalisation in the 17th Century. Names that come immediately to mind include the English East India Company established in 1602 and the Dutch East India Company established in 1600.

The idea of limiting liability as a lynchpin of business promotion is conceptually so fundamental (and brilliant) that it has become nearly universal to commercial life. We are talking restaurants and shoe shops here, not mega corporations. Promoters who operate under the protection of a company know that they don’t threaten their life style or their family’s welfare when they take a punt: all they risk is the money they actually put into the business. This allows businesses to grow and for risks to magnify without setting off alarm bells. The idea is so well understood that hospitals these days are run by corporations: even law firms have started to become limited liability partnerships! Mallya hasn’t done anything your doctor, your lawyer, even your dog food pet shop isn’t doing.

This brings us to the second major argument against Mallya: Kingfisher’s debts and the grave loss of ‘public money’. Grave error informs this argument. What is any bank’s job? They take deposits from the public at low interest rates, invest them in businesses as debt, earn interest, pay some of that money back to the depositors and keep the rest as profits. Banks have their risk taking shareholders like all other businesses do. In many mature economies (America being an excellent example), bankers see themselves as business partners to entrepreneurs, working with them to turn a profit. It is a sign of grave systemic immaturity when bankers begin to see themselves as bureaucratic cronies doling out loans to businessmen favoured by politicians. Indeed, it is a sign of another kind of immaturity to insist that promoters provide houses and personal guarantees as collateral security to every loan. This makes nonsense of the idea of limited liability and gravely undermines the entrepreneurial spirit. If India doesn’t have millions of corporate jobs desperately seeking people to employ, it is at least partly because we seem to have this crazy chip on our shoulders about entrepreneurs and the ideological consequences of bankruptcy.

This brings me to the curious case of CBI receiving complaints from IDBI and UBI asking it to identify officers who may have shown “undue favour” to Kingfisher. This occurred in the backdrop of the revelation that Kingfisher received a loan of Rs 900 crore from IDBI Bank in 2009 even though the company had negative projections in the near term and a negative net worth. It goes without saying that every crime, if shown to be committed, must be investigated and punished. The main thing to bear in mind is that loans may be entirely justified even if a company has a negative net worth or negative financials or both. I’d love to discuss the financials of many celebrity internet-based businesses with you anytime you like. Indeed millions of people throw good money after bad only to keep hopes of recovering bad money alive. The bigger issue to bear in mind is that “undue favours” are equally criminal when conferred on both successful and failed companies. Singling out Mallya sounds like persecuting the loser only because he lost. If you persecute everyone who took an “undue favour” because there was no other way to navigate the Kafkaesque dungeons of India’s crony capitalism, a lot of celebrity A-listers will break bread with Saharashree Subroto Roy!

This brings us to the heart of the great tragedy that is Vijay Mallya. How come this stunningly successful businessman met his waterloo in the skies, high above the Indian sub-continent? The answer is simply his obsession with sexy airplanes. Airlines are by definition fragile businesses, especially in India where governments can kill them in a day. Aviation turbine fuel is way too expensive, is way too heavily taxed and represents 45 per cent of the operational cost of an airline. Indian ‘aviation policy’ is designed mainly to keep our national career alive, which as we all know loses orders of magnitude more money than Kingfisher ever did. This is no problem because the aviation minister talks to the finance minister and they take the taxpayers money and give it to the airline. So far, CBI has never been invited to examine the criminality inherent in the ‘undue favours’ being shown to Indian Airlines.

When Jet and Kingfisher started to dominate Indian skies about 2010, Indian Airlines started to discount its tickets, forcing the others to react. Everyone totted up huge losses, which bothered Indian Airlines not a bit because it could always rely on the government to make those up. Everyone else lost money except Indigo, a budget carrier. Kingfisher and Jet reacted by buying budget carriers of their own – Air Deccan and Sahara – adding to their debts.

Meanwhile, in an attempt to stem the red, airlines tried to tap into international traffic. At this point, DGCA came up with its marvellous 5/20 guidelines, which allowed foreign airlines to fly in unhampered (and without reciprocal landing rights) but disallowed domestic airlines to fly out unless they had five years of experience and 20 aircraft. This policy favoured just one domestic airline, which everyone believed was especially beloved of aviation minister Praful Patel. Mallya tried instead to get the government to let him sell a meaningful share of his airline to international investors in 2011 but failed. Curiously, a year after Kingfisher went belly up, a change in FDI policy allowed Jet to sell equity to Etihad. Two years later, the Tatas put together a joint venture with Singapore Airlines and launched Vistara without a five-year track record or 20 airplanes in the kitty.

In the time since, Mallya tried repeatedly to settle his dues with banks but he simply couldn’t get anyone to take a write down. This is entirely understandable. Any banker who settled the debt at a discount was going to get accused of corruption. Imagine the incentive system here: for a banker to lose all the money is ok but to recover only a part of it is to face criminal cases for life. A deal could be made at a political level, but then, what could Mallya offer for a payoff? As I look at what went on, while I am as happy as the next man to see a crime punished, seen from the prism of policy manipulation and crony capitalism, the worse I see is a man unable to ‘manage’ the system. So far, I have yet to meet a haemorrhaging vocal castigator who has a shred of hard evidence to actually show that Mallya did something he shouldn’t have, or at any rate, something everyone who works here routinely doesn’t have to do as a matter of course. The demonisation of Mallya is a great workshop on how to run a smear campaign using only smoke and mirrors. Now we have the Supreme Court trying to bury Mallya’s demons. I wait with bated breath.

The bottom line for me though addresses the larger macro issue. India needs development, growth, industry, infrastructure, business, jobs….the whole shooting lot. Someone needs to have the vision to do it, and someone needs to have the courage to fund it. The risk is at least everywhere the reward is. If you are going to penalise failure by sending the risk takers to jail, you will never find an entrepreneur willing to start a new venture in India, nor will you find a banker to fund the risk. If you are one of those who want the best for your children, is all this criminal investigation around business failure the best way to get there? Worse, if you are one of those who avoided the risk and worked for a company all your life, what chance have you of putting bread on the table if you contribute to the promotion of an environment where no one wants to take the risk?

Originally published on April 7, 2016 in Business Today. 


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