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Will Vijay Mallya lose his “King of Good Times” Title?

by Tavaga Invest

The London court declared that Vijay Mallya was bankrupt on 26th June 2021. That order is a major victory for a group of Indian banks led by the State Bank of India, which has been fighting for this for years in prolonged, and expensive, litigation.

All of Mallya’s assets were immediately vested in a Trustee in Bankruptcy as a result of the order. This trustee, backed by a team, will be in charge of investigating Mallya’s affairs and determining his true assets and liabilities.

A Brief History

Vijay Mallya owed an estimated amount of Rs 9,000 crore to 17 Indian banks, including SBI bank, PNB bank, IDBI bank, and a few more. He has been accused of money laundering. Mallya fled to the United Kingdom in 2016 after facing pressure from lenders following the collapse of his Kingfisher airline. Mallya has stated publicly that he is ready to pay off his principal part of the debt to all the banks.

UB Spirits was headed by Mallya’s father, eventually, he inherited the business, which is best known for the Kingfisher beer brand, and turned it into India’s largest spirits producer. Other businesses of Mallya, like aviation infrastructure, real estate, and fertilizer, IPL tea did not do as well as UB spirits, with Kingfisher Airlines being one of the most notable failures.

Kingfisher Airlines shut down in 2013 due to a heavy debt burden that made it impossible for the airline to continue operating. The airline was also under investigation for possible money laundering and financial irregularities. 

The day a group of public-sector banks filed a complaint with the Debt Recovery Tribunal, Mallya left the country. In January 2019, Under the Fugitive Economic Offenders Act, he was declared a fugitive economic offender (A person against whom an arrest warrant has been issued for committing an offense listed in the Act with a value of at least Rs. 100 crores).

However, Mallya has denied all the allegations. The Indian government was attempting to extradite Mallya from the United Kingdom. The extradition was approved by the UK Home Secretary in February 2019.

The consortium of Indian Bank’s recently recovered Rs. 5,825 Cr from Vijay Mallya.

The consortium led by the country’s largest lender, State Bank of India (SBI) has recovered ₹ 7,182 Cr by selling defaulter Vijay Mallya’s stake in the United Breweries Ltd (UBL).

On June 23, 2021, banks recovered Rs 5,800 crore by selling Mallya’s shares in UBL to Heineken, which amounted to a 15% stake. They sold Rs 1,357 crore worth of shares in 2019. Banks have so far recovered Rs 7,182 crore from Mallya via share sales. 

Why did banks take so long to start recovering the money from Vijay Mallya?

The bank consortium provided Mallya with loans over a few years against the intangibles such as the company’s brand and goodwill, as well as Mallya’s guarantee. Banks were able to claim Mallya’s assets, including equities due to the personal guarantee provided by Mallya. 

However, the banks were unable to sell anything due to a court order prohibiting banks from selling assets in Mallya’s name. There was also Enforcement Directorate (ED) attachment on these assets, making it difficult for banks to act.

However, the bank consortium was granted the right to sell UBL shares by a special court established under the Prevention of Money Laundering Act (PMLC). The Indian Competition Commission also approved Heineken’s proposal to purchase the additional stake, allowing the bank consortium to proceed with the sale of UB’s shares.

Banks had previously attempted to recover money by selling Mallya’s real estate properties and other personal belongings. However, it was not successful. After three failed auctions, banks were able to sell the Kingfisher Villa in Goa for Rs 73 crore via a private treaty in 2017. Banks also attempted to auction ‘Kingfisher House’, the headquarters of Kingfisher Airlines but were unsuccessful. There hasn’t been any success with regards to the selling of real estate. Even if banks can sell Mallya’s real estate assets, the proceeds would be insignificant given the low value of the assets.

How will the Indian Banks consortium be affected due to the bankruptcy law passed on Mallya?

When a bankruptcy order is issued in the United Kingdom, all of the bankrupt’s assets are automatically vested in a Trustee whose job is to investigate the bankrupt’s affairs and determine their true assets and liabilities, to sell relevant assets, and repay the bankrupt’s creditors. A bankrupt person is required by UK law to cooperate with the Trustee in Bankruptcy.

Without the permission of the court, such a person is prohibited from obtaining credit worth more than £500 or acting as a director of a company. Unless an order suspending the discharge is issued, a bankrupt person is automatically discharged from their bankruptcy after a year.

Mallya’s lawyers have indicated that Mallya intends to appeal the bankruptcy order to a higher appellate court, arguing that the Indian banks were pursuing the same debt against him in both India and the United Kingdom. This could further lead to more prolonged legal battles. 

Bank’s growth has been slowed by massive bad loans, which have been amplified by legal and regulatory proceedings. 

The banks have recovered about 40% of the money lost in the frauds by businessmen Mallya, Nirav Modi, and Mehul Choksi. 

Is the extradition order related to the bankruptcy order?

The latest bankruptcy order is not connected with the extradition case. It would not have direct relevance to the topic of extradition but it could be used as a relevant fact in any deliberative process leading up to it.

Although banks were able to sell Mallya’s shares and recover a significant portion of the money, Mallya’s extradition remains crucial because he is being investigated for allegedly defrauding banks with the loan money. 

Mallya is accused by the CBI of diverting funds for other purposes. Their investigation revealed that after taking loans from IDBI Bank, State Bank of India, and a group of other banks, Mallya diverted the funds for purposes other than those promised to the banks.

From the loan proceeds of an SBI loan, Rs 15.90 crore was diverted to Royal Challengers Sports Private Limited, a Bengaluru-based IPL team. Similarly, there were diversions to entities like the Force India Formula One team.

As a result, bringing Mallya back to India is important not only for bank loan recovery but also for criminal investigations into the alleged fraud. 

While extradition is still uncertain, at the end of a long wait, there is now a sense of victory with the banks

What is the future of United Breweries?

UB is India’s undisputed market leader in beer and brewing, with its iconic brand ‘Kingfisher’ well-known around the world. Although Mallya is out of the country and is not involved in the day-to-day operations of the company, Mallya is still the chairman of UB on paper, which was part of his deal when he sold his stake.

However that might not remain the same in the future, the main reason for this is Heineken’s recent acquisition of Mallya’s shares via the Debt Recovery Tribunal, making it the company’s majority shareholder. Heineken’s shares were below 40% when it first entered the company and have now risen to over 60%.

Even then, it might not be easy to remove a chairman because it requires the approval of 75% of shareholders. Heineken will have to propose a resolution at its annual general meeting (AGM) to allow it to nominate a new chairman. It’s also possible that the two entities will reach an agreement so that Mallya can step down and have someone he approves as the new chairman.

What is the next course of action for the bank consortium?

Lenders must first identify Mallya’s assets in the United Kingdom and other countries. While assets in the UK can be sold and realized, it may take a long time in other jurisdictions because different jurisdictions have different requirements. Other creditors and employees may be able to claim Mallya’s estate depending on their contractual relationship, according to legal teams.

The Bottom Line

Vijay Mallya’s story is one of luxury, ambition, and greed. People used to feel sorry for Mallya because they believed his failure was due to the current economic situation and some sort of bad luck. However, a closer examination of the case reveals that this business engaged in excessive money laundering. 

Vijay Mallya was one of the country’s best business minds, capable of propelling India to new heights in the business sector. But Vijay Mallya’s greed leads him to the downfall.

Disclaimer: This write up is solely for educational purposes. This in no way should be construed as a buy/sell recommendation. Please consult your investment advisor before investing.

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