It was announced last week that there would be a new director on the board of Kingfisher Airlines; a nominee of the 13 banks that have lent vast sums to the troubled airline will join the existing eight directors — comprising three people from the promoter group/management and five others (a former chairman of Sebi, a former finance secretary, the head of a leading advertising agency, a former CEO who is also a chartered accountant, and Vijay Amritraj). Unless you are the very credulous kind, you are unlikely to believe that a solitary nominee of a lending consortium would make much of a difference to the functioning of an eight-member board that has allowed the company to run up debt of more than Rs 7,500 crore, to earn annual revenue of Rs 6,000 crore or thereabouts — with interest and financial charges equal to a quarter of revenue, and hence substantial losses every year. It is no wonder that the market value of the airline is all of Rs 2,200 crore.
The issue is not how Kingfisher is run (it may be in a financial mess, but at least it has won several awards for the quality of its service). The issue is how banks are run. Because what the banks (including the redoubtable ICICI and the leader of the consortium, State Bank of India) did, at the start of this month, was to convert a small part of their loans into equity capital — giving them a 23 per cent stake in the airline. It has already been reported that this conversion of loans into shares was done at a share price that was about 60 per cent higher than the prevailing market price. The justification has been that loans from group companies have been converted at the same price — but if news reports are anything to go by, the group loans were unsecured while the banks had secured company assets. So the two categories of loans were not on the same footing.
It is equally curious that the banks have settled for a little over 23 per cent of the company stock. Converting a slightly larger chunk of loans would have got the banks 26 per cent of the equity — and the right to block special resolutions. Converting a still bigger chunk (for about 30 per cent of the equity) would have reduced the Mallya group holding to less than majority, and thereby transferred some clout from the promoter group to the board of directors. And with 30 per cent of the stock, the banks could have asked for not one but three board seats, out of nine. Along with the independent directors (the ex-finance secretary and ex-Sebi chairman, say), the majority on the board could have demanded proper correctives from the airline management.
Considering that the banks are still owed about Rs 6,000 crore by the airline, which plans to issue more capital and/or take on more debt, it does require explanation as to why the banks have secured for themselves neither minority rights as significant shareholders nor proper board representation. This self-abnegation probably mirrors the failure to exercise rights that the banks would (should) have negotiated for themselves when giving the loans in the first place. The larger point is that the lenders now have the same level of effective risk as the shareholders — they are not going to get their money back until the airline makes a good profit. So why not convert all loans into equity, and then get the benefit of the upside (through share price appreciation) if the airline does indeed turn around? Would the banks care to explain?
