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Corporate Feb 14, 2013

How Mallya and Subrata Roy got their comeuppance

By R Jagannathan

Maybe it's just a coincidence. But over the last two days, two of India's highest icons of crony capitalism have finally see their luck run out.

On Tuesday, liquor baron Vijay Mallya's bankers finally gave up on Kingfisher Airlines and announced they would start recalling their Rs 7,000 crore plus loans. Since Kingfisher is already in rigor-mortis after the aviation regulator suspended its flying licence, there is nothing left for the banks to do but try and gather the pieces and see what they can recover from the debris. They'll be lucky if they get even half their money back. And there may be other claimants for the money recovered - the taxman, the airports, etc.

On Wednesday, after a tongue-lashing by the Supreme Court last week, chastened market regulator Sebi froze the bank accounts of two Sahara Group companies and attached the moveable and immoveable properties of its boss Subrata Roy, including many real estate assets.

Under an order dated 31 August 2012, Roy's Sahara India Real Estate Corporation and Sahara Housing Investment Corporation, both of whom raised thousands of crores illegally through optionally fully convertible debentures (OFCDs), were ordered to pay Sebi Rs, 24,000-and-odd crore by 30 November 2012, plus interest at 15 percent. The money was then to be distributed to nearly three crore of Roy's investors.

Neither Mallya nor Roy paid up. Nor will their tormentors get access to easy cash.

Like Kingfisher's banks, Sebi may find that there is very little money to be garnered from Sahara's frozen assets. In an affidavit filed with the Supreme Court last January, the group disclosed Rs 1,655 crore in cash and bank balances and fixed deposits as on 30 November 2011. In addition, it had Rs 23 crore in mutual fund units at that time. The rest of the money was invested in real estate projects, where exits may take time.

But in December 2012, the Sahara Group claimed it had repaid most of its investors, and only Rs 2,620 crore was left to be repaid.

Both Mallya and Roy may thus have left banks and Sebi holding the sack.

Let's see what else connects the two - Mallya and Roy. Their most obvious connection is in F1 racing, where they are partners in Force One. In October 2011, a financially-stretched Vijay Mallya turned to Roy for sharing the costs of Force One, and ended up giving him a 42 percent stake.

One wonders what possessed Roy to start racing, for even as he was inking the deal with Mallya, his own empire was about to be given a death blow by the Supreme Court. That blow came on 31 August 2012, when Roy's two companies were asked to return the cash to investors.

So both are being hounded for cash, but the larger connect relates to what is widely suspected to be crony capitalism. Neither of them could have survived in their slippery businesses this long without dollops of help from politicians and other powers-that-be.

Neither of them could have survived in their slippery businesses this long without dollops of help from politicians and other powers-that-be. Reuters

Neither of them could have survived in their slippery businesses this long without dollops of help from politicians and other powers-that-be. Reuters

Consider Mallya. His airline was practically unviable two years ago, but banks went on being indulgent with him till this week. In the process, the lenders would have lost more money than Mallya.

Ditto for Roy. Sebi went after him in 2010. After many skirmishes in court, Sebi finally nailed him in June 2011 over his illegal OFCDs. But even after this, Sahara was indulged by the courts, and it took another 15 months for Sebi to get a Supreme Court order in its favour. But even after this, it has taken five more months for Sebi to finally move on Subrata Roy's assets.

Clearly, if banks and Sebi finally bring the shutters down on Kingfisher and the two Sahara companies, India would have struck its first major blow against crony capitalism.

But there are more interesting parallels and divergences between Mallya and Roy that are worth noting for the record - especially their businesses.

Mallya entered the airline business but made a hash of it. He was sticking to a losing business out of hubris and, in the process, has lost a chunk of his profitable business - United Spirits - to Diageo.

Subrata Roy, too, ran an airline called Sahara Air, but he managed to dump it on Jet Airways' Naresh Goyal and even got some money for it. Goyal is still fighting Roy in courts to avoid paying the bits he hasn't paid. Roy proved to be a better airline businessman than Mallya. He got out just in time.

The other similarity between Mallya and Subrata is that they run businesses that rely a lot on cash.

Mallya's core liquor business has huge cash elements underlining it, partly because you can't advertise liquor and also because a lot of the money changes hands between manufacturers, dealers and wholesalers in cash. The liquor business is like booze - a lot of it happens outside the books.

Subrata Roy was into money circulation schemes - which is why he fell foul of both major regulators, Reserve Bank of India and Sebi. Many of his detractors allege that not all the cash he raised belonged to small investors, but Roy himself rejected allegations that he was dealing with "benami" money.

A lot of Roy's money went into yet another business that deals with cash - real estate. Yesterday's Sebi order freezes some of the underlying properties of Sahara Group along with their banks accounts. Since real estate often has a political linkage, the suspicion that Sahara was dealing with more than just small investors funds won't go away.

The Supreme Court judgment of last August said as much when Justice JS Khehar noted, on the basis of examining just one name on Sahara's investor list: "There is no other option but to record that the impression emerging from the analysis of the single entry extracted above is that the same seems totally unrealistic, and may well be, fictitious, concocted and made up".

For both Mallya and Roy, the game is up in at least one part of the business. One ran a business into the ground and jeopardised his larger empire, and the other took too much for granted with the regulators while running a barely legal business and met his nemesis.

However, given their obvious clout, one cannot yet say it is R.I.P.

by R Jagannathan

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