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Industrial Economist Administrator

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kandasamy@pppindia.com

A few months ago, Dr K C Chakrabarty, the outspoken former deputy governor of the Reserve Bank of India, was on his way to London, where he had taken up residence. He was stopped at the airport.

His ‘crime’ pertained to an earlier stint when he was chairman of the Punjab National Bank where it is alleged he used his office to favour a businessman who, it turned out, was allegedly involved in cheating and forgery. Some accounts say he was required only as a witness in the case.

A Look-out-Circular, or a LoC, is that concealed landmine which can blow up in your face if you are found leaving the country while under investigation. For less-influential suspects, it often results in a defacto presumption of guilt by authorities deciding their cases. After all, why were you leaving if you were innocent? reasons many a court.

Cuckoo flies out of the cage

Vijay Mallya also had such a LoC pending against him when, in March 2016, he managed to leave the country, not to return. The cuckoo flew out of the cage, unhindered. We now know, from CBI releases, that a LoC had been issued in September 2015 for Mallya. We also know that this LoC was downgraded from ‘detain’ to ‘inform’ soon after, according to news reports. The CBI claims that it was included in the ‘detain’ category by mistake. Further, a few days before he actually left, the State Bank of India, to which Mallya’s firms are most indebted to, was sufficiently concerned that India’s self-styled Richard Branson would flee, that they approached Dushyant Dave, one of the senior-most lawyers in the country, for an opinion on how best to stop him. We are told that the lawyer’s professional advice was not immediately followed.

We further know from Mallya’s claims in the UK Courts, where proceedings to extradite him are on, that he met the Finance Minister shortly before he left – though we do not know how formal that meeting was or what was discussed. And finally, we know that about a week after Mallya had gone, the consortium of banks that were trying to recover the money from Mallya firms, led by SBI, did indeed approach the Supreme Court to restrict him from leaving, with the Attorney General representing them in the apex Court! It was a week too late!

The scene has thus been ripe for political mudslinging and it is quite likely that this is all we’ll get to know since the smokescreen suits both sides of the political spectrum. That doesn’t mean that we can’t parse the narrative from the innuendo to understand firstly, whether Vijay Mallya deserves to be sitting in an Indian jail right now. Secondly, if he does, who is responsible for him not.

Really Guilty?

First: is Vijay Mallya guilty of crimes under Indian law? There are many, including Tavleen Singh writing in the Sunday Express (16.09.18), who argue that “Mallya was a businessman who lost money on an airline that failed. Not a criminal.” In fact, this also happens to be the gist of Mallya’s defence. And if that was his only blemish, then he certainly ought not to be jailed. But if only the facts were so simple.

Amongst the charges laid down by the investigating authorities are incidents of siphoning out money belonging to the listed entities, including Kingfisher Airlines, to fund Mallya’s private businesses and other similar corporate governance violations. For instance, when Diageo bought a majority stake in 2012, many analysts were aghast (albeit privately) that Diageo had also paid $36 million for a 50 per cent stake in a South African brewery that Mallya privately owned.

Now, one can always argue that using related party transactions for private benefit is standard fare among Indian promoters. But that only says that at best, Mallya can be accused of being as corrupt as any corrupt Indian businessman. It is indeed no ‘running a business that happened to fail.’ And when, as it did with Ramalinga Raju, the law catches up with you, you have to serve your time.

Then there is the matter of not paying employees – and consequent violations of labour laws, as well as the new Companies Act which makes a Director responsible towards all stakeholders. So, therefore, to argue that Mallya could not be charged if he was in India is a tad simplistic. It is another matter that he is entitled to put forth his defence and prove himself innocent. But face the law he must!

Once we have established that there was a case to detain Mallya in India, the next question is who was responsible for him fleeing. Again, if the State Bank officials were apprehensive about his escaping, that means the dilution of the LoC happened way before the alleged meeting between the Finance Minister and Mallya on the day before he left. But to say that the vast Indian intelligence machinery had no inkling of Mallya’s arrangements to leave the country for good might be taking us all for fools. And armed with that knowledge that he had left, to then make a show of approaching the Supreme Court to impound his passport a week later reads only as a charade.

Bankers at fault?

The other question that regularly rears its head in this debate is the role of the banks who lent such vast sums of money to Mallya, without adequate guarantee. The best answer probably can be found in Dr Raghuram Rajan’s submissions before the Parliamentary Standing Committee for Finance. He says that a large number of the NPA accounts originated in the 2006-08 period, as an irrationally exuberant response to the strong economic growth and the successful completion of previous infrastructure projects. He then recounts the anecdote of a promoter who told him that he (the promoter) was pursued by bankers waving cheque-books, asking him to name the amount he wanted.

These heady times lead to a weakening of credit analyses and leveraging by banks. Now, one must remember that Kingfisher, as well as several other big names such as Essar Steel that have been taken through insolvency proceedings recently, are not first-time defaulters. These have been through defaults even previously and had their debts restructured. However, for the banks looking to improve their balance sheets substantially, these profligate corporates were their best bet.

This was then compounded by a lack of any semblance of governance at public sector banks, with influence and kickbacks dictating the terms and quantum of each loan. It is perhaps only natural that things reached this pass.

One could even argue that this is not a phenomenon restricted to India. Irrational exuberance, after all, was a term coined in the heady of days of Alan Greenspan in the US. But unlike in the US, where most beneficiaries of the government bailout repaid their dues, in India, tax-payers and citizens are left holding the can.