The Art of Borrowing by Anil
Bhatia
Vijay Mallya did it and so can
you—with some help from bankers and a motley bunch of conspirators in
suits. There were many indignant protests by well-meaning citizens when
India’s Prime Minister and Aviation Minister made some noises that the
Government would look at bailing out Kingfisher Airlines. Coming so soon
after a debate on the Poverty Line that the Planning Commission got
caught in, people were disgusted to hear that some of New Delhi’s power
elite thought Rs 32 per day made you rich enough not to need any dole,
while others thought that high-flying industrialists who owned airlines
were poor enough to need it. Capitalism for the poor and Socialism for
the rich! People made much of Vijay Mallya’s garish and loud lifestyle,
his ownership of villas, yachts, cricket and F1 teams. Why on earth
should such a man’s floundering business be rescued with taxpayers’
funds? Why indeed? Perfectly decent folks have asked this question.
Bailing out Kingfisher, they think, means bailing out Vijay Mallya. This
naivete is almost touching. Let us, for a moment, say that the Government
decides not to extend a lifeline to Kingfisher, and lets it
crash-land—that is, lets the company declare bankruptcy. The Canadian
equities research firm Veritas actually went public with a report some
months ago that stated that Kingfisher was already insolvent and could
not carry on as a ‘going concern’. If the airline goes bankrupt, Mallya
stands to lose whatever he has invested. First, in starting the airline,
then in buying out Deccan, and even in the subsequent rights issue of
shares that he subscribed to. These investments may have had historical
monetary value, but the world of finance operates on the basis of
‘present value’. Today, the airline’s market capitalisation—share price
multiplied by all shares in existence—is about Rs 1,250 crore. Its
promoters hold 58.6 per cent of its ownership. So, if it shuts down,
Mallya stands to lose Rs 730 crore, the value of his stake in the
business.
Let’s look at who else would
lose: »
First, commercial banks, led
by State Bank of India—which, by a rather stupid decision earlier this
year of converting a large part of their outstanding loans into shares,
together hold 23 per cent of Kingfisher—would lose Rs 291 crore as
shareholders. »
Second, commercial banks, led
by SBI. Again. They remain the airline’s bankers. Last counted, the
airline had loans to the tune of Rs 7,000 crore (and growing) to pay off.
Also, as interest mounts on the principal each passing day, potential
losses get bigger still. By the time Kingfisher formally goes bust, debt
of some Rs 8,000 crore would likely need to be written off. Since it
doesn’t own too many aircraft (most are on lease), there isn’t much by
way of assets for banks to seize. »
Third, State-run oil companies
such as Indian Oil, BPCL and HPCL that supply aviation turbine fuel to
the airline on credit. Kingfisher reportedly owes them roughly Rs 1,000
crore. »
Fourth, the Airports Authority
of India and its joint ventures with private firms in Mumbai and Delhi.
Kingfisher owes them about Rs 250 crore, as per newspaper reports.
»
Fifth, the Taxman and others.
Various tax-deduction-at-source and provident fund dues of employees that
were never paid to the authorities would be lost—about Rs 422 crore, by
one estimate. Kingfisher reportedly owes the Centre Rs 110 crore in
service tax as well. »
Sixth, customers who have
booked and paid for tickets in advance, and may not be able to fly.
Counting just a third of Kingfisher’s advance-booked passengers, that
would amount to Rs 2,000 crore at any given moment. »
And finally, its 7,000 odd
employees. Apart from being rendered jobless, they would suffer in other
ways too. Their PF has already gone missing, and would stand to lose
gratuity and other benefits. No matter how you look at it, it would be an
ugly sight. But if you add up the numbers, it’s clear that for every
rupee that Mallya loses in case his airline folds up, taxpayers lose Rs
14. We are not privy to what the man must be saying in his meetings with
government officials, but it must be to the effect—‘If you want to let
Kingfisher sink, go ahead; but remember you go down fourteen times
deeper.’ As they say in the world of high finance, if you owe your bank a
hundred dollars, it’s your problem; but if you owe your bank a hundred
million, it’s your bank’s problem. This is just one example of the many
ways businessmen leverage their one rupee to borrow and get extended
credit for amounts that can be five, ten or—in the case of the wily Mr
Mallya—even fourteen rupees. It’s all about how you structure your
business financially. Borrowing money to set up a business is one of the
founding principles of Capitalism. Nothing wrong with that, one may say,
as long as the borrower is able to pay the interest regularly and return
the principal. Of course, there are Ponzi schemes that frequently pop up
in various parts of the world from time to time. Named after an
enterprising businessman in the US, this refers to a sport in which you
borrow from one, and then borrow from another to repay the first, and
borrow from a third to repay the second, and so on. The game, on paper,
can continue endlessly. But, to the chagrin of its perpetrators, the game
is up once more than one lender shows up.
Encyclopedias describe it as a
‘pyramid scam’ by which early investors are paid out of funds put in by
later investors, who are often far more numerous, lured as they are by
the ‘returns’ made by early investors. India too gets its share of Ponzi
schemes at regular intervals. While most scams of this sort are
perpetrated by over smart alecs with village buffoons as their victims,
there have been instances of high-society types getting swindled as well.
But by and large, these ‘schemes’ are so crazy that it leaves the rest
wondering why on earth anyone would fall for them. However, not every
such scam is obvious to the undiscerning observer. In fact, if you look
closely, the term could apply to some of our grand infrastructure
projects—especially ‘public-private’ partnerships—that are often touted
as the best thing to have happened to civilisation since Ancient Romans
learnt to pave their highways. Picture yourself as a smart alec from one
of India’s many fast-growing states—Andhra, Gujarat, and now even
Bihar—who happens to run a small family business and is an old pal of the
local Mantriji. With suitable inputs from his ministry’s babu, Mantriji
floats a scheme to put up a large power generation project, say, worth a
hefty Rs 2,000 crore. You summon a huddle of the large extended undivided
family, and count your blessings, cash piles and bank accounts. Let’s say
you have only Rs 100 crore. That elder who you think has been going
senile scoffs and mumbles something to the effect of boys these days
wanting to set up projects 20 times larger than the collective family
wealth. You sigh deeply and buy him a ticket to Haridwar, Kashi,
Chitrakoot or wherever. From here on, he can run the family charitable
trust and generate goodwill. The Rs 2,000 crore power project is of
national importance, being of strategic value to the country’s growth, so
the government has sanctioned a 12 per cent ‘guaranteed return’. This
bait is to be used to get banks in. At high leverage. This implies that
instead of the prudent 2:1 debt-to-equity ratio, you can stretch it to
3:1. In simple English, that means for every rupee that you put in, the
bank will give you a loan of Rs 3. If you put in Rs 500 crore, banks will
release Rs 1,500 crore. Now, in a company with Rs 500 crore of equity
capital, promoters need to have only a little more than Rs 250 crore
worth of shares to have a controlling stake of just over 50 per cent. The
rest can be dispersed among a million investors. But then, that doesn’t
solve your problem. All you have is Rs 100 crore. You are Rs 150 crore
short. What do you do? You appoint a Merchant Banker—guys in suits who
help you raise money from capital markets. They make you incorporate a
new company with Rs 100 crore in capital, its 100 million shares (of Rs
10 face value each) owned entirely by you and your family. After that,
riding on the wonderful project you have bagged, they help you launch an
Initial Public Offer (IPO). You offer the public another 100 million
shares at Rs 40 each, a premium of Rs 30. So what if the project has not
even acquired land, leave alone plant and machinery, forget generating
even a single megawatt of power? The Merchant Banker’s PR division plants
helpful stories in the press extolling the virtues of the project and its
promoters. Helpful stockbrokers circulate stories of the grey market
premium that the yet-to-be-sold shares command. Your IPO is
‘oversubscribed’ thanks to the Standard Tricks Department of the Merchant
Banker, and the shares debut on the stockmarket at Rs 50, trading at Rs
10 more than the issue price of Rs 40. The net worth of your company is
now Rs 500 crore: Rs 200 crore paid-up capital (half of it yours) and Rs
300 crore in the share premium account. And you still own half the
business. To meet their lending targets (and keep Mantriji happy), the
banks promptly sanction Rs 1,500 crore in loans. Mantriji, a coalition
partner in the state government by virtue of his three seats in the
Assembly, provides support to the Chief Minister, whose party survives on
a one-vote majority. Of your 50 per cent ownership, he has been given a
secret 10 per cent stake. Of course, he does not own it directly but
through two other local businessmen—one, a former property dealer, now a
real estate company, and the other, a former tent-tamboo trader, now also
a real estate company. With Rs 2,000 crore in your kitty, you now set off
to distant shores to buy power equipment. Your travels take you to Old
Europe, to the not-so-old US, and finally to New China, where you settle
on state-of-the-art technology for Rs 1,000 crore. Next, your travels take
you to Dubai, Singapore and finally Mauritius. Here, your Merchant Bank
helps you set up a company that buys this equipment for Rs 1,000 crore
from your Chinese suppliers, and then sells it, in turn, to your Indian
market-listed power company for Rs 1,500 crore. Thus, your Rs 100 crore
investment has already generated Rs 500 crore for you in a tax haven.
Satisfied, you return to India with the peace of an ascetic and spirit of
a man who has travelled the world to see India succeed. With the balance
Rs 500 crore, you acquire land in a formerly ‘no-go area’ at throwaway
prices from naïve tribals who are easily pleased with a third-rate
hospital you set up for their upliftment (thus acquiring a do-gooder’s
public image). In two years, the project is up and running. To guarantee
12 per cent returns on the Rs 2,000 crore project, the government buys
electricity from you at a price that generates Rs 240 crore. You pay your
banks Rs 150 crore in interest, and earn profits of Rs 90 crore on
capital of Rs 200 crore. That is an earning-per-share of Rs 4.5, enough
to keep your share price in a range of Rs 50-75 and your IPO investors
happy. The Rs 500 crore you ‘earned’ in Mauritius, though, has shrunk to
Rs 250 crore because you had to pay off the Merchant Banker, Mantriji,
his babu, the press, and a few jholawalas and sundry accomplices. But you
are now the proud owner of a Rs 2,000 crore company in India, and have a
neat Rs 250 crore in dollars overseas. You can now set up another
infrastructure project. This time, your money enters the country as FDI
from your Mauritius company. Oh, we forgot to mention the ‘Business- man
of the Year’ award that a business TV channel will give you this year.
And the Bharat Sammaan to be awarded by a Hindi TV channel. It’s only a small
dent in your overseas bank account. You deserve every bit of it, of
course, for having brought so much investment into the country, setting
up critical infra projects, putting up schools and hospitals. And those
dumb Americans call such path-breaking projects Ponzi schemes!
__,_._,___
|
