Banks are hounding Mr Vijay Mallya to recover from his personal wealth the amount Kingfisher Airlines (KFA) borrowed from them. Mallya had given a personal guarantee for the loans and liabilities of KFA during its crisis. In accordance with the 2014-15 annual report of the group's holding company (United Breweries Holding Limited), the consortium of bankers had invoked the company's corporate guarantee and demanded a payment of Rs 6,603 crore due from KFA along with interest.
The failure of KFA has severely hurt the otherwise successful UB group and its shareholders. The UB Group had launched the KFA in 2005 as a five star airline when the aviation industry was in a boom. KFA had set high standard of passenger services. In 2007, it acquired low-cost carrier Air Deccan, and later merged the same with it. Though, the real objective of the acquisition was to cross the legal hurdles of flying internationally quickly, KFA operated in both - LCC and premium segments. Experts believe that the acquisition of Air Deccan and operating in both the segments at the same time was a bad strategy, which caused its downfall. KFA never earned profit. It accumulated loss and debt. It went through two debt restructuring. It started defaulting. In 2012, the Directorate General of Civil Aviation suspended the scheduled operator's permit resulting in grounding of the airline. KFA's failure is attributed to many reasons, including high fuel cost, competition from LCCs and bad business strategy resulting in overinvestment and high operating costs.
Read more from our special coverage on "ACCOUNTANCY"
The KFA story highlights the governance philosophy of family-controlled business groups in India. Groups often build diversified portfolio of business to reduce the risk of family investment. Diversification strategies and other corporate strategies are decided at the family level, outside the board of the holding company or a group company. Those are often formulated based on family needs, such as succession plan, and reflect the aspirations of the family. The board simply approves the strategies placed before it. For example, the investment in KFA by the UB group reflects the aspirations of Mr Mallya. Some observed that the KFA model reflected his flamboyant personality.
Every business family aims to protect and create family wealth. Therefore, the interests of stakeholders are protected. But, sometime, promoter's exuberance and aspirations expose the company to unwarranted risks, the family focuses on empire building or family feud destroys wealth. It is utopian to expect independent directors to protect the company from undue risks arising from such exuberance and aspirations, family's empire building initiatives or poor family governance. At best, the board is used as a sounding board, while the final decision remains with the family.
Banks take promoter-director's personal guarantee while approving debt restructuring. Recently, the government had advised public sector banks to invoke personal guarantee at an early stage of the recovery of debt that has become a non-performing asset (NPA). The promoter has no option but to put at stake his/her personal wealth when the company passes through a financial crisis and seeks funding from banks. This is against the very basic principle of 'limited liability', which connotes that the liability of a shareholder in a company is limited to the amount that s/he commits to invest in the company. However, this is the reality. Promoter's personal guarantee provides comfort to lenders that the promoter, in order to protect his/her personal wealth, will not willfully mismanage the company or expose it to unwarranted risks. However, it might stifle the entrepreneurial spirit of the promoter. More importantly, this practice has given credence to the corporate governance philosophy that the family, not the board, is the highest decision-making body.
In family-managed business groups, the monitoring role of independent directors is secondary and the advisory role is primary. It will remain so even if the law emphasises the monitoring role. Moreover, as in the case of KFA, independent directors, who have no stake in the company, prefer to resign from poorly governed or crisis-ridden companies, rather than continue and protect stakeholders' interest. Resignation of a number of independent directors in a short span signals that a crisis is brewing in the company or the company is poorly governed. This information is valuable to stakeholders. We do not need a separate corporate governance model for family business. But we should limit our expectations from independent directors.
Affiliation: Professor and Head, School of Corporate Governance and Public Policy, Indian Institute of Corporate Affairs; and Chairman, Riverside Management Academy Private Limited. email: asish.bhattacharyya@gmail.com
