Fourteen banks, 13 of which are public sector banks, stand to lose nearly Rs 4,300 crores on account of the loans they have advanced to the grounded Kingfisher Airlines. Of this amount, the State Bank of India, India’s largest bank and the biggest lender to the Kingfisher Airlines, expects to make a loss of over Rs 900 crore. This was revealed in an internal assessment prepared by a senior SBI official in December 2016. The assessment, which was not put out in the public domain, was recently shared with the Economic and Political Weekly by a whistle-blower.
The assessment of loss was prepared on December 7, 2016, by Govind Subbanna, chief general manager of the SBI’s Mumbai-based “mid corporate group” and submitted as a memorandum to the bank’s “Special Committee of the Board for Monitoring Large Value Frauds (Rs 5 crore and above)” for its meeting that was scheduled and held nearly two months later on February 17 this year.
Analysing various assets pledged by Kingfisher as security against loans, the memorandum concludes that not only does the market value of these assets amount to just Rs 1,565 crore, but the recoverable value works out to only Rs 1,071.64 crore against an exposure of around Rs 4,457 crore. The total loss to the SBI and the other banks is calculated as the difference between their individual exposures and their share in this recoverable value. SBI, which has the largest exposure to the KFA amounting to Rs 1,202 crore, declared the loan as a non-performing asset in 2011 and classified it as a “fraud” in September 2016. The memorandum pegs the bank’s recoverables at arund ₹200 crore. This assessment offers a first peek into the losses that Indian banks stand to incur on loans disbursed to the beleaguered airline, which was grounded in 2012 by India’s aviation regulator, the Directorate General of Civil Aviation.
A detailed questionnaire was sent to the SBI chairperson Arundhati Bhattacharya by email and also by regular post on May 17, 2017. On June 8, a spokesperson of the SBI responded by email, stating, “It is a policy of the Bank not to comment upon Individual accounts and it’s treatment.”
Debt Recast Agreement
As many as 17 banks had extended term loans to Kingfisher Airlines between 2009 and 2012, a period when the airline’s business steadily deteriorated and it found itself unable to repay its dues. In 2010, 14 of these banks formed a consortium to pursue these loans together. On December 21 that year, the consortium of banks signed a Master Debt Recast Agreement with Kingfisher Airlines. The agreement merged all the loans into a single term loan. Various assets that Kingfisher Arlines had pledged to the banks as security were also pooled together. To this, the agreement added a personal guarantee offered by businessman Vijay Mallya, who launched the airline in 2003, and a corporate guarantee by United Breweries (Holdings), a listed company which is a parent to Kingfisher Airlines.
In the case of a recovery, banks agreed to share the proceeds proportionate to their respective share in the total exposure. The SBI memorandum in the possession of the EPW uses the total outstanding exposure as on January 31, 2014, to calculate banks’ respective shares. As on that date, the airline owed Rs 6,955 crore to the banks, including interest. Thirteen of these are public sector banks, facing 99% of the total exposure, led by the SBI (26.9% share), followed by IDBI Bank (12.7% share), and Punjab National Bank (11.7%) (see Table 1 for all the banks’ exposures). Axis Bank, the only private lender, has a mere 0.8% share in exposure.
For the purpose of loss calculation, the memorandum considers SBI’s exposure to be Rs 1,201.19 crore and not Rs 1,874.66 crore due on January 31, 2014. The SBI spokesperson did not clarify how and why this reduction came to be. Assuming that this was on account of some recoveries the banks made in the intervening period, and further assuming that these recoveries were shared with other banks in terms of the debt recast agreement, we have adjusted the consortium’s total exposure based on the fall in SBI’s exposure. Accordingly, the total exposure is assumed to have reduced from Rs 6,955.97 crore to Rs 4,457.11 crore.
Assets deemed worthless
The memorandum’s calculation of losses is based on its analysis of how much value can be recovered from Kingfisher Airlines’ assets that were pooled under the debt recast agreement. Interestingly, it does not consider recoverable value of the guarantees made by Mallya and UB (Holdings), even though these were also a part of the agreement. We will come to that later.
The total market value of all current and fixed assets of Kingfisher Airlines are shown to have a write-down value of Rs 395 crore as on March 31, 2013. But this entire asset base is worthless, according to the memorandum. While the write-down value of current assets of the company, including spares, consumables and book debts, was Rs 186.12 crore on March 31, 2013, their realisable value is considered zero. According to the memorandum, this is because “the spares are spread across various airports and the value, quantity and quality of the same is unascertainable as on date”.
Similarly, while the write-down value of Kingfisher Airlines’ fixed assets, such as ground support equipment, was Rs 131.09 crore as on March 31, 2013, the memorandum finds them worthless because “these are not easily identifiable and spread over at various airports, as the company is defunct since December 2012”. The third set of assets deemed worthless are two helicopters owned by the airline, whose write-down value was Rs 78 crore on March 31, 2013. The “DGCA ... informed that these two helicopters are stationed at Juhu Aerodrome, Mumbai,” the memorandum states. “These are in unserviceable condition. Hence realisable value is considered ‘nil’.”
Kingfisher Airlines properties
Two real estate properties of the airline were pledged to the banks: Kingfisher House, the airline’s erstwhile headquarters near the Mumbai airport, and the Kingfisher Villa in Goa. The Goa villa was sold in March 2017 to Sachiin Joshi, a businessman, for Rs 73 crore, after three auctions failed to find buyers. These were held in October 2016, December 2016 and March 2017 at reserve prices of Rs 85.29 crore, Rs 81 crore and Rs 73.1 crore respectively.
Joshi’s purchase, which has been described as a “private transaction”, was not reflected in the memorandum since it was prepared three months earlier, in December 2016. The price Joshi paid is slightly higher than the memorandum’s recovery estimate of Rs 68.23 crore, but lower than the true market value of Rs 85.29 crore, which it attributed to a July 2016 valuation by PC Gupta, a valuer.
Kingfisher House in Mumbai still has no takers. The memorandum states that its market value is Rs 106.95 crore based on a June 2016 report by Bhide Associates, a consultancy firm. It estimates the recovery value to be ₹85.56 crore. In the last auction held in March 2017, the House failed to find bidders for a reserve price of Rs 103.5 crore.
Despite its pessimism about Kingfisher Airlines’ physical assets, the SBI memorandum is strangely upbeat about the airline’s brand value. Kishfisher Airlines owns nine trademarks such as the airline’s trademark, logo, and taglines like “Fly Kingfisher” and “Fly the good times”. Their patent registration restricts their use to the airlines business only, and not to beer or water. The SBI memorandum reports that the market value of these nine trademarks is between Rs 6.37 crore and Rs 313.8 crore based on valuation conducted in 15 different business scenarios by RBSA Valuation Advisors LLP, which submitted its report on February 18, 2015. The memorandum states a very wide range of the recoverable value of these trademarks: between Rs 5.4 crore and Rs 266.7 crore.
This is surprising. The realisable value of these trademarks is what a buyer would be expected to pay to use these trademarks on another airline. Obviously, the buyer would expect to recover this expenditure by gaining advantage of the “Kingfisher Airlines” brand. This seems improbable, as has been evident from the consortium’s failure to sell these trademarks. In April 2014, the consortium of banks led by SBI invited expressions of interest from the public for purchasing the nine trademarks. “The response to the public notice was not evident,” according to the SBI memorandum.
Then, the consortium tried to sell the trademarks at two auctions: the first, held on April 30, 2016, had a reserve price of Rs 366.7 crore, while the second was held on August 25, 2016, at a reserve price of Rs 330.03 crores. Both failed. After the first auction failed, a Press Trust of India report quoted an anonymous banker saying, “It is better to start a new airline company than to buy this brand and revive it.” After the second auction failed, an anonymous intellectual property rights expert told the PTI: “[The] value of trademark [sic] of the entire group has gone down to almost nothing and nobody will like to buy it.”
Yet, the SBI memorandum seems upbeat about selling the trademarks, and proposes now to value and auction the nine trademarks separately. It is not clear if this exercise has begun.
The SBI does not seem to have learnt from banks’ earlier encounters with Kingfisher’s brand values. In 2011, a year before it was grounded, the Kingfisher Airlines brand was valued at nearly Rs 4,100 crore by consultancy firm Grant Thornton. This valuation, which the consultancy had said was only for “internal purposes” and not an investment advice, was nevertheless used by the airline as collateral to borrow more money from banks such as IDBI Bank, which, as a charge-sheet prepared by the Central Bureau of Investigation has revealed, preferred the brand valuation as a collateral over tangible assets such as shares of United Spirits, a well-to-do sister concern which is under the UB Group. The CBI later arrested former IDBI Bank chairperson and other senior officers.
In 2016, the Serious Fraud Investigation Office of the Ministry of Corporate Affairs sent a notice to Grant Thornton for its brand valuation, according to a report in Mint newspaper. The consultancy clarified to the publication that it stood by its valuation which was “appropriate in the context of when it was done and the purpose for which it was done”. Going by this, the question arises as to whether the SBI should be pinning hopes on a brand valuation of Kingfisher prepared in 2015. After all, between then and when the memorandum was signed, the airline and its founder have arguably become national icons of corporate defaulters to public sector banks (even though they are nowhere the largest). Several warrants have been served on Mallya, who has since resigned his membership of the Rajya Sabha or the upper house of Parliament and moved to the United Kingdom in an apparent self-exile, and from where he now faces extradition.
United Spirits shares
ICICI Bank, which had lent Rs 450 crore to the airline, sold its entire exposure to SREI Venture Capital’s Indian Global Competitive Fund in July 2012. ICICI’s loan was backed by shares of United Spirits. In 2014, when its share price increased following news of its partial sell-out to Diageo PLC, Indian Global Competitive Fund sold all its pledged shares of Kingfisher Airlines and earned Rs 1,341 crore. After adjusting Rs 690 crore against its exposure in Kingfisher Airlines, it deposited the remaining Rs 651.15 crore in the Karnataka High Court.
The banks now want this balance amount. They filed a suit in a civil court in Bengaluru to this effect, but this plaint was dismissed on July 16, 2016. The banks have challenged this verdict before the Karnataka High Court (SBICap Trustee Company Ltd v IDBI Trusteeship Services Ltd and others, 2016). Their petition had not been admitted at the time of writing this article on June 11. Yet, an amount of Rs 651.15 crore has been included in the SBI memorandum as a “receivable,” and forms a substantial chunk of the total Rs 1071.64 estimated recovery of the bank.
This is the reason we argue that SBI has overstated its recoveries. Excluding the amount pending before the Karnataka High Court, the consortium’s recoveries fall to Rs 420 crore and their losses work out to Rs 4,037 crore, with SBI losing Rs 1,160 crore out of its exposure of Rs 1,201 crore. Additionally, assuming that Kingfisher Airlines’ trademarks are worthless gives us the worst-case scenario, under which the bank consortium’s losses are Rs 4,303 crore as their recoveries fall to Rs 153 crore, which is the value of both the real estate properties (see Table 2).
As mentioned, the memorandum surprisingly does not analyse recoveries from the guarantees offered by Mallya and UB (Holdings). In fact, after it was prepared, the consortium initiated two court cases that can tilt all these calculations.
In 2013, after the loan to Kingfisher Airlines was classified as an non-perfoming asset by most banks, the consortium had filed an application before the Debt Recovery Tribunal, Bengaluru (SBI and Ors v Kingfisher Airlines Ltd and Ors, 2017) demanding a recovery of Rs 6,203.35 crore invoking these two guarantees and additionally dragging Kingfisher Finvest (India) Ltd, a 100% subsidiary of UB (Holdings), for recovery. The demanded amount was based on Kingfisher Airlines’ dues as on May 31, 2013. In its application, the consortium sought payment of interest at 15.2% per annum from June 1, 2013, until the date of payment. On January 19, 2017, the debt recovery tribunal ruled in favour of the banks ordering Mallya, Kingfisher Airlines, UB (Holdings) and Kingfisher Finvest Ltd to “jointly and severally” pay the demanded sum to the banks.
The other legal victory against Kingfisher Airlines was in a suit that the consortium along with engine and oil suppliers (who had also claimed unpaid dues of about Rs 524 crore) filed before the Karnataka High Court to “wind up” UB (Holdings) for failing to discharge its obligations as a corporate guarantor. On February 7, 2017, the court ruled in favour of the petitioners and ordered an official liquidator to take charge of the company’s assets and proceed with their sale.
It is not clear why the SBI memorandum did not take into account the probablity of winning these cases, even as it considered Rs 651 crore as a receivable when their claim over the amount has not even been admitted by the high court. Both these court victories came after the memorandum was prepared but well before it was presented to the Special Committee of SBI’s board on February 17, 2017. The documents made available to the EPW suggest that the memorandum was not updated to reflect recoveries resulting from these victories.
This is surprising. After all, the consortium spent considerable resources and several years fighting these legal battles. Instead, the SBI memorandum only mentions the debut recovery tribunal case as part of a timeline of developments in the Kingfisher Airlines account. The timeline does not mention the winding up petition at all. In the questionnaire sent to SBI chairperson Bhattacharya, we asked why this was so. We had also asked if the memorandum had been updated, or if the committee took cognisance of the court victories and ordered a fresh study. Since SBI has a policy to not discuss individual accounts, we do not know the present position.
To speculate, it is possible that the banks are pessimistic about any actual recovery from these assets. For instance, the assets of UB (Holdings) may not be sufficient for banks to recover their dues. As the high court judgment remarks on its winding up petition, the quantum of the consortium’s claims renders UB (Holdings) “commercially insolvent and a mere skeleton [with] ... some assets and liquidity” (IAE International Aero Engines AG and others v United Breweries (Holdings), 2017).
Perhaps this is why the consortium of banks has never closed their doors on a one-time settlement with Kingfisher Airlines and Mallya. In March 2016, Mallya, on behalf of Kingfisher Airlines, UB (Holdings) and Kingfisher Finvest offered a settlement amounting to Rs 4,000 crore, which consisted less of actual cash and more of an array of receivables such as a recall of pre-delivery payments to Airbus, and some financial claims the company has made in court against an engines supplier. These offers were made after the banks had reached the Supreme Court with a request for Mallya to declare, on oath, all his financial interests in India and abroad, including those of his family. (The banks had landed at the court’s doors after this request was not considered by the debt recovery tribunal and subsequently the Karnataka High Court.)
This offer was rejected by the banks for lacking bonafide intentions, a claim that the Karnataka High Court judgment (on UB Holdings’ winding up petition) supported by saying that Mallya’s proposal showed “lack of bona fides” as it was “hedged” with conditions that were “practically impossible of compliance”. The court judgment mentioned that Mallya made a second offer, which was also rejected by the banks (IAE International Aero Engines AG and others v United Breweries (Holdings), 2017). Yet, the consortium has reiterated that it is still open for a settlement, but that they require a proof of bonafide intention from Mallya. Before the Supreme Court, the consortium has demanded that Mallya can prove this by declaring all his assets on oath and making a “substantial” deposit before the Court (State Bank of India and others v Kingfisher Airlines Ltd and others, 2016).
On May 9, 2017, the Supreme Court found Mallya guilty of contempt of court for not declaring these assets, but ordered him to be present before the court on July 10, 2017 for contempt proceedings. Interestingly, the guarantees offered by Mallya and UB (Holdings) are themselves under legal challenge. In 2013, before the banks had approached the debt recovery tribunal, Mallya and UB (Holdings) filed a civil suit in the Bombay High Court claiming that they were coerced into offering their guarantees, and appealed that these guarantees be termed invalid. They have additionally appealed for a decree that the liability under the guarantees is limited to Rs 1,601.43 crore “based on admissions by the consortium of lenders” (UB [Holdings] 2016).
This is unlikely to go through. The Karnataka High Court referred to the coercion claim as “sham and moonshine” remarking that it was more likely that the banks were the ones being coerced (IAE International Aero Engines AG and others v United Breweries (Holdings), 2017). Still, according to its status on the Bombay High Court website, the suit is still is at a “pre-admission” status even though four years have passed; the last hearing in the case was in June 2015 (United Breweries [Holdings] and others v State Bank of India and others, 2013).
The revelations of the memorandum, and the means by which it has been brought to light, raise important questions about SBI’s self-confessed policy to not reveal details about its loan to Kingfisher Airlines. As we described earlier, the memorandum records a fall in SBI’s exposure to the airline from Rs 1,874.66 crore in 2014 to Rs 1,201 crore in December 2016. The Karnataka High Court judgment mentions that Rs 544 crore were recovered from stock sales. But that does not justify the Rs 673 crore reduction in Kingfisher Airlines’ liabilities to SBI alone.
In November 2016, the DNA newspaper published an “exclusive” story that the bank had transferred several bad loans, including those of Kingfisher Airlines, to the Advance Under Collection Account, which, as the publication described, is “a bin for toxic loans,” a mechanism through which non-performing assets are taken off the bank’s balance sheet without ending recovery efforts. As SBI head Bhattacharya clarified later, this does not amount to a write-off.
But the memorandum in the possession of EPW reveals that the Kingfisher Airlines loan was moved to he Advance Under Collection Account as early as March 2014. That even two years later this information was considered “exclusive” shows that we know far less about this murky topic than the SBI is willing to disclose even in its internal documents.
This article first appeared in the Economic and Political Weekly.