Kingfisher Scam: Fall of the king of good times

It aims towards discussing the cause for his doomed airline business, and how he managed to get a loan of such a vast amount from the Public Sector Undertaking (PSU) Banks in a country like India, where it involves a lot of documentation, formalities, and securities before getting the loan. The article further deals with the impacts caused, the changes brought in the legislation, and the aftermath of the scam.
Estimated Reading Time: 11 minutes

Introduction

When one fails, he gets up and works harder; but when one falls under the trap of greediness, his failure becomes the end. The same happened with the case of the Vijay Mallya the mastermind of landmark Kingfisher Scam , who is one of the most glamorous personalities a business tycoon in the world. He is also known by the title, the ‘king of good times’ [1]due to his extravagant lifestyle.

His ever-increasing success in his business turned him greedy to make more and more money ina short time. It resulted in making terrible decisions, which caused him severe financial loss, and he had to take massive loans from different banks, which he never paid back. He is accused of causing the kingfisher scam in India of about Rs. 9,000 crores but could not be tried by the court since he is living in a foreign country.

Background of Kingfisher Scam

Vijay Vittal Mallya was born in Bantwal, Karnataka, on 18th December 1955 to Vittal Mallya, who was a successful businessman and chairman of the United Breweries (UB) Group, and Lalitha Ramaiah Mallya. He graduated from St. Xavier’s College, Kolkata, with a B.com degree in 1976. At the age of 27, he became the chairman of UB Group, which is a conglomerate company most famous for its selling of beer and liquor, after his father’s death. While he was very young and inexperienced for the position, the employees, who were working from his father’s time and were much experienced than him, believed from the beginning that he is not an ordinary young man and would take the company to the next level of success, which later became true. Initially, the turnover of the company was at Rs. 350 crores at the time of his father. With his consistent hard work and determination, the company’s valuation rose from Rs. 40 crores to Rs. 6,000 crores. In 2007, Forbes magazine declared him as the 40th richest man in India.[2]It was the golden moment for him.

He, further, tried to expand his business by investing in different sectors such as the newspaper, chemical industry, andthe engineering sector.However, he learned that the most profiting business was the selling of beer and liquor; hence, he only focused on it. He ambitioned to expand his business globally. Consequently, his company spread over 57 countries, and in 2015, itbecame the second-largest selling ofbeer and liquor brand in the world and received a doctorate in ‘Business Administration’ from the University of Southern California.

Strategy for promotion

The Indian Ministry of Health (IMH) conducted research and found that the consumption of cigarettes, liquor, and beer is extensively harmful to health. Therefore, it imposed a complete ban on advertisement and branding for its promotion.[3] On 8th September 2008, Cable Television Network (Regulation) Amendment Bill was passed by the parliament, which prohibits the advertisement of beer and liquor in India.

However, India, which is the second-largest populous country in the world with approximately 1.3 billion people, is a good source of money for the business of selling alcoholic beverages. So, the companies use the surrogate methods for its advertisement and branding such as displaying it in movie scenes and T.V. shows in the name of soda. Similarly, Vijay Mallya used different ways to promote his brand, named Kingfisher. He kept the name of his residence as the ‘Kingfisher Villa,’ hence, whenever his house was shown on the news, ultimately, the brand was promoted. Moreover, hestarted sponsoring events and bought one of the IPL teams named ‘Royal Challengers Bangalore,’ to promote the Kingfisher liquor brand. This enabled him to become the second-largest brand in the world.[4]

Also Read : Enron Scam, the biggest scam in history of America

Facts of the Kingfisher Scam

Establishment of airline

On 9th May 2005, Vijay Mallya launched the Kingfisher Airlines (KFA). It was a completely new experience for him to have a business in the aviation industry.He had the same ambition of expanding KFA to a global level as his initial business. For this, he ensured luxurious facilities for flight passengers. According to him, the passengers should be treated like his guests, and nobody should go with a disappointed after using their flight.[5]Gradually, it became the most luxurious and the second-largest domestic flight in India, having one-fourth share of domestic travellers of India.

As soon as he received success in domestic airline services, he aspired to achieve the same for the international flights. According to the then 5/20 rule by the IndianMinistry of Civil Aviation, the criteria for having a business of international flights wasa minimum requirement of five-year experience in domestic service and twenty airplanes for international flights.[6]To expand KFA at a global level, he had to wait for another three years for eligibility.

Adverse decisions

However, he did not want to wait for that long. He became impatient and hence, decided to buy an airline company that is already eligible for international service. Accordingly, he bought Air Deccan, which was known for its low-cost airline service in India. Both KFA and Air Deccan were very distinct airlines and had no link with each other, as one was the most luxurious, the other was the cheapest. This created a pressure on him to manage the services at low budget. His vision for the business was, “Only Expansion, No Profitability.”

The name of Air Deccan was changed to‘Kingfisher Red.’ He categorised the two airlines based on facilities provided. The passengers who desired to travel in a luxurious flight would opt for Kingfisher Airlines, whereas those who wanted to travel at low fares would opt for Kingfisher Red Airlines. However, the facilities of Kingfisher Red were no less to KFA. As compared to the other low fare airlines, Kingfisher Red had many lavish facilities. The passengers becamehappier with Kingfisher Red than KFA due togoodfacilities at a lower cost.

Soon, the market stake of KFA started declining, and the operative cost began turning into debts. To balance the situation, he increased the fare cost of Kingfisher Red. It resulted in passengers to leave even that airline, and they diverted towards other cheaper airline services.Consequently, Vijay Mallya started experiencing a great deal of loss in his airline business. There were three main reasons for the failure;

  1. due to an increase in ticket prices,
  2. inflation of fuel in the market, and
  3. due to economic slowdown, also known as a recession, in 2008.

Impact of downfall

His airline business was in downfall. Due to the non-recovery of landing charges, some of the airport hubs such as Bangalore and Hyderabad International airports changed specific policies for KFA and Kingfisher Red airlines that they have to pay first and then only they could land their flights on their airports.

Moreover, he was also banned from buying fuel from two prominentIndian oil and natural gas companies, namely, Hindustan Petroleum (HP) and Bharat Petroleum, due to his already existing vast due charges. Besides, the Indian Oil company did agree to provide fuelbut on a cash basis, which means after the full payment of fuel in advance.[7]This was because they all lost faith from Vijay Mallya that he would pay on time.

Foreign Direct Investment

Since it became challenging to manage the business, he decided to contact foreign companies for their investment in his business. This seemed a possible solution for his financial crisis. Accordingly, he managed to convince one foreign airline company named Etihad Airways to invest in Kingfisher Airline. However, until 2012, it was not allowed in India to have a Foreign Direct Investment (FDI) in airlines sector. The airline industry was 100% domestically owned business during that time.

This became another obstacle for Vijay Mallya. He then decided to convince the government of India to alter specific policies as he was facing financial distress. He eventually applied for an application. Nevertheless, since it was entirely a government work, it took much time for itsapproval.Meanwhile, he got himself engaged in the work of making Kingfisher Calendars and focused on taking auditions of the models for the same.

Consequently, he could not pay the salaries to his airline employees due to his downfall and busy schedule.After several months of the strike, the employees started leaving the job and joined other airline companies as it was not digestible for them to know that despite saying that it is a bad phase, Vijay Mallya was busy taking the auditions of the models. Following that, the Kingfisher airlines got closed. In December 2012, the government also cancelled its license.

Support from banks

The last possible option which he was left with was taking the loan from the banks. He specifically targeted Public Sector Undertaking (PSU) Banks, which are government-owned banks. He ended up taking a loan from seventeen different banks, out of which the majority were PSU banks. Private banks were reluctant to give him a loan. However, the two banks, namely, HDFC and ICICI banks, gave the loan to the UB Group against the securities of United Spirits Limited, and later they recovered their money by selling the shares.

Debt restructuring fraud

After receiving loans in dense masses, he applied for a scheme called ‘debt restructuring,’ which is a process where the debts of a financially distressed company, who are incapableof repaying, are renegotiated and reduced to restore bank liquidity. In this case, the debt was converted into equity, which means to wave off the debt, and instead, the company would give its shares to the bank upto the value of debt. The shares of KFA was valued at Rs. 64.49,whereas it was trading at Rs. 39.90 in the market.The justification given by Vijay Mallya was that since they have a bad phase in their business, the market trading value is decreased to Rs. 40, otherwise the real valuation was of Rs. 65. However, it was later found that their all-time high value of the share was Rs. 48. Indirectly, he was trying to wave off his debts.

Political Connection

The reason behind the PSU banks giving loans to Vijay Mallya, despite his dooming business and low credibility, was because he was a member of Rajya Sabha (Upper House) and had good political connections.[8]It resulted in banks officials to get involved in the landmark kingfisher scam. The banks were pressurized by the government officials to grant him the loan. Due to this reason, SBI Bangalore granted a loan of about Rs. 1,600 crores to him.

Moreover, according to the banking norms, when a certain amount of loan is given to a person, and if he wantsfunds beyond thatlimit, then a ‘No Objection Certificate’ (NOC) is required. Initially, SBI bank was not ready to grant him this certificate as there were already existing debts against him. However, it was exposed that P. Chidambaram, the then Finance Minister of India, helped him in getting the loans. Hence, SBI did a meeting, loosened their policies and granted him NOC under pressure.

Left India

On 2ndMarch 2016, Vijay Mallya got into many negotiations with banks. When the debt amount rose to Rs. 9,000 crores including interest rate, he asserted that he is ready to pay Rs. 6,000 crores, which was just the principal amount. He demanded to wave off all the interest amount. However, the banks wanted the full recovery of debt. In the meantime, he escaped from India and got settled in Britain. Today, he is in the ‘Wanted List of India’ for his wilful default, and since he is residing in a foreign country, he could not be presented before the court.[9]

Allegations

The section 82(1) of Criminal Procedure Code, 1973 (CrPC) providesthat if any person prevents himself from the execution of a warrant, the court may write a proclamation requiring him to be present at the mentioned place within thirty days of that proclamation. Further, section 82(4) of CrPC provides that if the person does not comply with section 82(1), he would be classified as a ‘proclaimed offender.’

On 18th April 2016, a non-bailable warrant was issued against Vijay Mallya by the Enforcement Directorate (ED), as he was accused of not recovering bank debts. He was required to appear at a specified location, but he never came. Despite calling him several times by the ED, he avoidedto appear and instead asserted that all the allegation against him are made-up. Due to this kind of behaviour, he was categorised as a ‘proclaimed offender.’[10]

Moreover, section 166 of Companies Act, 2013 provides that a company director has the following duties;[11]

  1. to have good faith and to act in the best interest in terms of obtaining business outcomes and employees respectively,
  2. to exercise his duties with reasonable care, skill and diligence, and to use his judgements independently,
  3. to avoid circumstances which may conflict with the interest of the company, and
  4. to avoid any unjustified gains, the breach of it would amount to a fine equal to that gain.

Vijay Mallya was also charged under section 166 of the said act due to the following reasons;

  1. he failed to exercise his fiduciary duties to his employees, shareholders and investors,
  2. he compromised corporate ethics while buying the Deccan Airlines,
  3. he paid Rs 30 crores to the owner of Deccan Airline named G.R. Gopinath, without letting his shareholders know, which showed how little he cared for his shareholders and created suspicion of dishonesty,and
  4. he misused his power and connections to get a loan from banks.

Changes after the Kingfisher Scam

Following the Kingfisher scam, the Central Vigilance Commission (CVC) directed the PSU banks to make the loan verification more robust and stricter by hiring consultancies or by setting up a new division for the second time verification of the documents based on which the loans are granted by the banks. Moreover, SBI affirmed to protect the bank’s interest and public money after the lessons learned from the kingfisher scam.

The aftermath of Kingfisher Scam

Since Vijay Mallya is one the persons in the ‘wanted list of India,’ he had tried to convince government officials, presently Bhartiya Janta Party (BJP) is the ruling political party.However, he is not able to. Recently, on the social media (twitter) platform, he offered to pay the 100% debt to the banks. All his attempts to persuade the government have been in vain.

Conclusion

Ultimately, the general public is the one who suffers from the loss caused by the kingfisher scam since it was their hard-earned money collected by the government as tax for the welfare of everyone. Hence, instead of tying-up with the business tycoons in financial frauds, government officials must prevent it by saying ‘no’ to corruption.


[1]VilasiniPollisetty, The Case of Vijay Mallya and Kingfisher Airlines, S.P.I., March 2019, https://sevenpillarsinstitute.org/the-case-of-vijay-mallya-and-kingfisher-airlines/.

[2]Sweety Gupta, Case Study From Riches to Rags: The Story of Vijay Mallya, Pacific Business Review International, January 2017, http://www.pbr.co.in/2017/2017_month/Jan/22.pdf.

[3]Prohibited and controlled advertising in India, Lexology, May 2019, https://www.lexology.com/library/.

[4]Ashok Panigrahi, A case study on the downfall of kingfisher airlines, Review Article, July 2019,file:///C:/Users/Harshita%20Ranjan/Downloads/KingfisherAirlines-JMRA.pdf.

[5]Kingfisher airlines, T.O.I., July 2019, https://timesofindia.indiatimes.com/topic/kingfisher-airlines.

[6]Mahipal S. Rathore, 5/20 Rule of the Aviation, Study IQ, February 2020, https://www.studyiq.com/blog/5-20-rule-of-civil-aviation-burning-issues-free-pdf/.

[7]Amy Kazmin, The fall of Vijay Mallya, Financial Times, May 2016, https://www.ft.com/content/85252402-1249-11e6-839f-2922947098f0.

[8]F.E. Online, Vijay Mallya case: Letters make explosive revelations against Manmohan, Chidambaram, F.E., January 2017, https://www.financialexpress.com/industry/vijay-mallya-case-letters-make-explosive-revelations-against-manmohan-singh-p-chidambaram-kingfisher-airlines/528845/.

[9]Rahul Srivastav, Such Good Times: How Vijay Mallya left India, and can he ever be brought back?, Daily O, Febrary 2019, https://www.dailyo.in/politics/vijay-mallya-extradition-london-uk-home-secretary-sajid-javid-kingfisher/story/1/29336.html.

[10]Aditi Singh, Vijay Mallya declared proclaimed offender by Delhi court in FERA violation case, Live Mint, January 2018, https://www.livemint.com/Politics/5pO0dp6FgDxC9vW9UsH4PI/Vijay-Mallya-declared-proclaimed-offender-by-Delhi-court-in.html.

[11]VilasiniPollisetty, The Case of Vijay Mallya and the Kingfisher Airlines, Seven Pillars Institute, May 2019, https://sevenpillarsinstitute.org/the-case-of-vijay-mallya-and-kingfisher-airlines/

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