Vijay Mallya: The poor bank’s Donald Trump

Vijay Mallya's finances were still very unstable. IndiaPictures/UIG via Getty Images
21 March, 2016

A recently discovered video on YouTube is a 1998 interview of the business baron Vijay Mallya by television presenter Nikki Bedi. Bedi asks Mallya for his thoughts on being referred to as the “Donald Trump of India.” Mallya eloquently replies, “Well, I don’t know Mr Trump personally. I have read a lot about him. He obviously likes to live his life as I indeed do, but I am not yet anywhere near bankruptcy.”

Even then, Mallya’s gumption was hardly justified. Prior to the recent Kingfisher Airlines debacle and even prior to the 1998 interview, though he was not quite bankrupt, Mallya’s finances were still very unstable. The comparison to the current candidate for the Republican nomination for President of the United States Donald Trump wasn’t far off the mark.

Both gentlemen have a similiar style of transacting business. Both of them rely heavily on leveraging debt to buy out companies, and both have repeatedly relied on their respective governments to bail them out. Time and again, a number of ventures under their name have applied for debt-restructuring—a process that helps companies facing cash flow problems to renegotiate their debt, so that some funds are released for business operations—and despite the frequent liquidity crunch in their companies, both have amassed massive wealth for themselves. Mallya and Trump were both bequeathed a massive inheritance, and have proceeded to splurge it on expensive cars, yachts, gadgets and apartments across the world.

Trump Taj Mahal, Trump Plaza Hotel, Trump Hotels and Casino Resorts and Trump Entertainment Resorts have filed for bankruptcy in 1991, 1992, 2009 and 2011, respectively. Mallya's list of bad financial decisions includes forays into companies that have no connection to the UB group's core liquor and beer business.

All throughout Mallya's career, his ventures outside the core business have rarely taken off. On the other hand, the liquor business started by Mallya's father continued to be a major market player and the golden boy of the UB group stable. Mallya allegedly took liberties with that business as well and diverted funds from the alcohol business to the now defunct airlines.

A February 1992 story in the magazine Business Today, titled, “Is Mallya broke?,” states that his United Breweries Group (UB), then valued at Rs 1,865 crore was “foundering following a serious cash crunch.” In the article, Mallya himself admitted to a “liquidity problem.” A number of ventures under the UB group—some started by him and some, acquired by him—were going through a rough time in the 1990s.

By March 1992, Unitel, his telecommunications firm, was “limping behind” other telecom companies with “accumulated losses set to cross Rs 18 crore.” When his earlier attempts to sell the company failed, Mallya made a last ditch effort to bring the company back on track. But old habits die hard, and IDBI Bank—which is now in trouble for helping Mallya out with a loan of 900 crore—then jumped in with a rehabilitation package of 12.75 crore. A former member of the telecom commission was brought in as the CEO of Unitel, and a new telecom infrastructure was set up to wipe the losses. Optimistically, experts expected Unitel to make a small profit by 1993-94. But it failed to take off and by the mid nineties, it was in a “precarious condition.” The last balance sheet the company filed was for the financial year 2003. It’s current status is that of “under liquidation.”

Another acquisition, Best & Crompton (B&C), an engineering firm Mallya acquired in 1989, was soon beset with labour troubles and by the early 90s, its business dwindled as government orders and infrastructural projects started waning. In 1991, it managed to raise Rs 32 crore from the markets, only to land in a cash crunch over the next five years. By 1997, the Board of Directors under Mallya’s chairmanship resigned en-masse. The Madras High Court pitched in by constituting a new statutory board to help steer the sale of the company to an Indonesian firm, Polysindo. Even in 1992, signs that B&C wasn’t the best of acquisitions were obvious. Business Today, in a story published in that year, quoted the chief of a financial institution saying that the B&C acquisition was made on “pure impulse” and that the former liquor baron had no clear business strategy before deciding on the acquisition.

Even at that time, the unnamed chief warned that the UB group had “spread its resources too thin” and ran an “extremely high-cost operations with high inventory levels.” This situation repeated itself in the first decade of this century, as Mallya continued to take risks while side-stepping concerns raised by professionals over his entry into the aviation business.

History attests that Mallya is a serial risk-taker and not a particularly prudent one. The Rs 9,000 crore loan from a consortium of banks is not the first time Mallya has found himself weighed down with high debts. In 1991 alone, the UB group’s borrowings had shot up by an unbelievable 77 percent, much of which had been channeled into dud investments.

His entry into the beverages sector backfired as well. Rush, Sprint and Thril, cold drinks launched by him in the early 1980s that were expected to compete with multinationals, closed shop within a short time after their launch. The UB group ended up footing a bill of Rs 33 crores, a massive sum for the time, for Mallya’s bravado.

Another Mallya investment, the Mangalore Chemical and Fertilizers company, acquired by him in 1990, remained mired in labour problems. Within four years of his chairmanship, the company was declared a sick company (a company with accumulated losses equal to or exceeding its entire net worth) and approached the Board of Industrial & Financial Reconstruction (BIFR) for rehabilitation packages. In 2001 the company got an “one-time settlement scheme” in its favour, which called on a cohort of lenders, led by none other than IDBI bank, to forgo interest amounting to Rs 135 crore.

Time and again, Mallya has shown himself to be an entrepreneur who is keen to take a jump without assessing all the risks involved. Before Mallya decided to enter the aviation business, the UB group’s CFO Ravi Nedungadi had warned him against it. "I have to focus on value creation and fund allocation. So it was my job to caution our people that the aviation industry is very challenging from purely financial parameters,” Nedungadi told the Economic Times in 2012, while looking back at the launch of the airlines. He was not wrong. Given the number of players in the market, the competition underlying the Indian aviation market is high, and a strong profit is highly dependent on operational efficiency and smart managerial leadership. That operational efficiency has never been Mallya’s forte became apparent in his open handed handling of the airlines’ expenses.

KFA’s initial service, which began in 2005, merely included two Airbus A320s flying out of Bangalore, but a month later in Paris, he stumped his sceptics by placing a US $3 billion order for five Airbus A380 jumbos, five A-350s and five A-330s for delivery by 2012. But these deliveries were never taken. By 2012, the airlines had gone awry, and the company was saddled with US $1.7 billion in net debts and sales had taken a dive by 87 percent.

In the beginning, KFA took to the markets well, and even managed to corner 15 percent of the Indian market share to itself. The airlines, which has never showed a profit since its launch in 2005, railed ahead with an aggressive advertising and marketing plan. Senior staff was often hired or poached with as much as 75 percent hikes, wrote the journalist K Giriprakash in his 2014 book, The Vijay Mallya Story. A combination of inept business policies, shoddy management practices and cost overruns continued to erode the airlines’ performance. Simultaneously, the airlines continued to function without a sustainable business model and kept burning through cash lent by the banks.

Within two years of its launch, the death knell rang out, and as it acquired a domestic competitor, Deccan Airlines, in June 2007. After the merger of KFA and Deccan Airlines, the combined entity commanded a hefty market share of 33 percent, but also ended up with a combined accumulated loss of Rs 2,000 crore. From here on, it went downhill for the company as it struggled to keep up with servicing its enormous loans. In November 2009, the merged company reported a net loss of Rs 418 crores and laid off 100 pilots in view of huge losses. In the next two years, the company’s debt had eroded more than 50 percent of its net worth, and its dues to private firms and tax authorities kept mounting. By late 2014, United Bank of India declared Mallya a “willful defaulter” and in February 2015, he lost control over his valuedKingfisher houseto the banks’ consortium.

In an April 2012 article, the financial analyst and journalist Sucheta Dalal wrote about how Mallya often tended to overleverage and play fast and loose with UB Group’s fund:

“His losses then, even adjusted for inflation, were significantly lower and Mr Mallya got out of the sticky situation by selling real estate, Berger Paints, Best & Crompton and Kissan Products. Then, too, Mr Mallya had tried to diversify out of liquor business into a set of core sector activities including engineering, fertilisers and telecom. He was financially overstretched and had borrowed beyond his repayment capacity. However, the booming liquor business (and the fact that global liquor brands decided to seek entry into India by buying into his companies) and soaring realty values helped him out of the mess.

But Mallya has done it again. This time, his debts are bigger and, given a chance, he would like to dump his losses on to banks which have deliberately chosen to ignore the history of his reckless borrowing and furious acquisitions (a big part of Kingfisher’s problems is Air Deccan). Banks not only allowed him to borrow beyond prudential limits, but did not object to his pocketing a guarantee fee running into crores of rupees at a cost to his shareholders which he is trying to wiggle out of.”

Media narratives on Mallya have always compared him to Trump, and the former liquid baron has often reveled in such comparisons, even encouraging them. In Harish Maiya’s book, The King of Good Times, he states, “It is not a complete depiction of Dr Mallya when one calls him the Richard Branson of India.” (Mallya was awarded an honorary doctorate by the Southern California University for Professional Studies.) Maiya notes that Branson started out by selling records from his one trunk in London and did not have a family business to rely on, and that the comparison to Trump is more in keeping. “In the business world, both Dr Mallya and Mr Trump can be described as icons with nerves of steel, hearts of gold and a flare (sic) for making audacious and precise deals.” In fact, Maiya goes on to say, Mallya’s “high flying lifestyle” projected a true brand image, and gave hope to many, to follow their dreams.

It's not known if Mallya really modelled himself on Trump, but if he had modelled himself on Richard Branson, perhaps he would not be where he is today.