Category: World of Business

Vijay Mallya – liquor baron, industrialist, playboy, member of Rajya Sabha. He was envied by everyone when he was at his peak. But now times have changed along with his fortunes. He might still be the liquor baron but unlike booze, in the airlines sector, you really got to fly to be high.

Kingfisher Airlines Limited is an airline group based in India. Kingfisher Airlines has a 50% stake in low-cost carrier Kingfisher Red (through UB group). Till December 2011, Kingfisher Airlines had the second largest share in India’s domestic air travel market.  In May 2009, Kingfisher Airlines carried more than 1 million passengers, giving it the highest market share among airlines in India. Kingfisher also won the Skytrax award for India’s best airline of the year 2011. Kingfisher Airlines is also the sponsor of F1 racing franchise, Force India, which Vijay Mallya also owns.


The airline has been facing financial issues for many years. Ever since the airline commenced operations in 2005, it hasn’t been generating profits. After acquiring Air Deccan, Kingfisher suffered a loss of over Rs. 1,000 crore for three years on the trot. By early 2012, the airline accumulated losses of over Rs. 7,000 crore with half of its fleet grounded and several members of its staff going on strike. Kingfisher’s position in top Indian airlines on the basis of market share had slipped to last from 2 because of the crisis. Shareholders haven’t been getting return on the money they invested, they haven’t made a single penny in profit since the inception of the airlines in 2005.More than a dozen of the aircrafts were grounded due to serious engine problems for which Kingfisher  threatened to sue the engine maker, IAE (International Aero Engines). Kingfisher Airlines owes a sizeable amount of money to state-owned Airports Authority of India and GMR Delhi airport, to oil companies (HPCL, BPCL) that have twice grounded its fleet by not supplying fuel until the money was wired into their accounts. Kingfisher Airlines delayed salaries of its employees in August 2011,for four months in succession from October 2011 to January 2012 and again in the past 4 months. Pilots and staff have already gone on strikes innumerable times until recently. Since 2008, Kingfisher Airlines has been unable to pay the aircraft lease rentals on time. Many companies have decided to stop renting aircrafts to KFA. The CBDT (part of the finance ministry) had frozen many of KFA’s bank accounts. The final nail in the coffin came from the DGCA when it suspended KFA’s flying license last week.


Hirai and Wipro’s Azim Premji who decided to practically work for free for a year or two. A notable exception to the raft of CEOs opting for lesser pay is Sanjay Aggarwal, the chief executive of Kingfisher Airlines.  Aggarwal’s pay has actually nearly doubled in the year to end March from a year earlier, according to the company’s 2011-12 annual report.

One wonders if this is the same Dr.  Mallya who four years ago was talking of operating Airbus A340-500 for long-haul direct flights to the United States from India. He had booked five A380s.

All that is now part of his dream which has truly travelled to a very distant past and his vision has become increasingly blurred due to many factors both within and beyond his control. True, Mallya chose to chew more than he could swallow.

Even Mallya did not expect in his wildest dreams that the valuation of Kingfisher Airlines will drop to just $245 million which is even lower than what he paid Captain G R Gopinath for Air Deccan.

Mission “Kingfisher Salvation” was always going to be hard but a few steps in that direction have been taken.In Nov 2010, Kingfisher Airlines had completed restructuring Rs. 8,000 crore of debt, with all 18 lenders agreeing to cut interest rates and convert part of loans to equity. Kingfisher Airlines has already pledged its brand as collateral with its lenders for Rs. 4,100 crore. Aviation in India requires a lot of financial backing due to the various roadblocks like high ATF rates and high airport taxes. Shareholder confidence got a boost last month when the government finally gave a green light to 49% FDI in aviation by foreign carriers. But apparently the foreign carriers seem to have deemed the airlines beyond saving with talks with Etihad and Qatar fizzling out. However, the staff accepting the offer of payment of last 4 months and returning to duty, has boosted the investor confidence and irked the DGCA to consider roll back of the suspension. Another good news comes from FIIs who have more than doubled their stake in the airlines, despite the uncertainties hovering over survival of the airline. Holdings of both HNIs (High Net-worth Individuals) as well as small investors have increased by 4.59 and 3.81 % respectively as compared to June. Merger with United Breweries (UB) is always the fallback option for Mallya if he wishes to see his planes taking flight and not grounded.

IndiGo has paved the way to do operate in India. Jet has also shifted its focus to the low frill sector.  Kingfisher was launched as an all-economy, single-class configuration aircraft with food and entertainment systems. After about a year of operations, the airline suddenly shifted its focus to luxury. It changed the configuration of its Airbus 320 aircraft (around 14 of them in the fleet back then) to 20 business class and 114 economy class seats from 180 all-economy seats. It continuously experimented with its business model but never really came to a conclusion. On the other hand, IndiGo patiently formulated  a  solid business plan in. Its plan was to stick to operating a single configuration aircraft, adopting  point-to-point connectivity model. The airline launched with one aircraft and had a plan to add an aircraft every six weeks, giving them enough time to stabilize. Furthermore, the plan also meant sticking to its low-frills airline identity where meals and drinks were sold on-board and not given for free. More and more airlines across the world have started following this model. It’s high time that Kingfisher also adapted to it if it wants to be reinstated as the King of Good Times.

The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. In addition to being the largest bankruptcy reorganization in American history at that time, Enron undoubtedly is the biggest audit Failure. Before its bankruptcy on December 2, 2001, Enron employed approximately 20,000 staff and was one of the world’s leading electricity, natural gas, communications, and pulp and paper companies, with claimed revenues of nearly $101 billion in 2000. Fortune named Enron “America’s Most Innovative Company” for six consecutive years.

Enron was formed in 1985 by Kenneth Lay after merging Houston Natural Gas and InterNorth. Several years later, when Jeffrey Skilling was hired, he developed a staff of executives that, through the use of accounting loopholes, special purpose entities, and poor financial reporting, were able to hide billions in debt from failed deals and projects. Chief Financial Officer Andrew Fastow and other executives were able to mislead Enron’s board of directors and audit committee of high-risk accounting issues as well as pressure Andersen to ignore the issues.

Enron’s stock price, which hit a high of US$90 per share in mid-2000, caused shareholders to lose nearly $11 billion when it plummeted to less than $1 by the end of November 2001. The U.S. Securities and Exchange Commission (SEC) began an investigation, and Dynegy offered to purchase the company at a fire sale price. When the deal fell through, Enron filed for bankruptcy on December 2, 2001 under Chapter 11 of the United States Bankruptcy Code, and with assets of $63.4 billion, it was the largest corporate bankruptcy in U.S. history until WorldCom’s 2002 bankruptcy.

As a consequence of the scandal, new regulations and legislation were enacted to expand the reliability of financial reporting for public companies.


The Rise of Enron

Kenneth Lay founded Enron in 1985 through the merger of Houston Natural Gas and InterNorth, two natural gas pipeline companies. In the early 1990s, he helped to initiate the selling of electricity at market prices and, soon after, the United States Congress passed legislation deregulating the sale of natural gas.

The resulting markets made it possible for traders such as Enron to sell energy at higher prices, allowing them to thrive. After producers and local governments decried the resultant price volatility and pushed for increased regulation, strong lobbying on the part of Enron and others, was able to keep the free market system in place.

By 1992, Enron was the largest merchant of natural gas in North America, and the gas trading business became the second largest contributor to Enron’s net income, with earnings before interest and taxes of $122 million. The creation of the online trading model, Enron Online, in November 1999 enabled the company to further develop and extend its abilities to negotiate and manage its trading business.

In an attempt to achieve further growth, Enron pursued a diversification strategy. By 2001, Enron had become a conglomerate that both owned and operated gas pipelines, pulp and paper plants, broadband assets, electricity plants, and water plants internationally. The corporation also traded in financial markets for the same types of products and services. As a result, Enron’s stock rose from the start of the 1990s until year-end 1998 by 311% percent, a significant increase over the rate of growth in the Standard & Poor 500 index. The stock increased by 56% in 1999 and a further 87% in 2000, compared to a 20% increase and a 10% decline for the index during the same years. By December 31, 2000, Enron’s stock was priced at $83.13 and its market capitalization exceeded $60 billion, 70 times earnings and six times book value, an indication of the stock market’s high expectations about its future prospects.

“Enron has been elevated to a symbol”, says Woody Dorsey of Market Semiotics, an institutional forecasting service.”There’s a whole new level of uncertainty about profits, about the integrity of the accounting profession and of Wall Street.”

Causes Of Downfall:

Enron’s non transparent financial statements did not clearly detail its operations and finances with shareholders and analysts. In addition, its complex business model stretched the limits of accounting, requiring that the company use accounting limitations to manage earnings and modify the balance sheet to portray a favorable depiction of its performance. According to McLean , “The Enron scandal grew out of a steady accumulation of habits and values and actions that began years before and finally spiraled out of control.” From late 1997 until its collapse, the primary motivations for Enron’s accounting and financial transactions seem to have been to keep reported income and reported cash flow up, asset values inflated, and liabilities off the books.

The combination of these issues later led to the bankruptcy of the company, and the majority of them were perpetuated by the indirect knowledge or direct actions of Lay, Jeffrey Skilling, Andrew Fastow, and other executives. Skilling, constantly focused on meeting Wall Street expectations, pushed for the use of mark-to-market accounting and pressured Enron executives to find new ways to hide its debt. Fastow and other executives, “…created off-balance-sheet vehicles, complex financing structures, and deals so bewildering that few people can understand them even now”.

· Special purpose entities

Enron used special purpose entities—limited partnerships or companies created to fulfill a temporary or specific purpose—to fund or manage risks associated with specific assets. The company elected to disclose minimal details on its use of special purpose entities. These shell firms were created by a sponsor, but funded by independent investors and debt financing. By 2001, Enron had used hundreds of special purpose entities to hide its debt.

The special purpose entities were used for more than just circumventing accounting conventions. As a result of one violation, Enron’s balance sheet understated its liabilities and overstated its equity, and its earnings were overstated. Enron disclosed to its shareholders that it had hedged downside risk in its own illiquid investments using special purpose entities. However, the investors were oblivious to the fact that the special purpose entities were actually using the company’s own stock and financial guarantees to finance these hedges. This setup prevented Enron from being protected from the downside risk.

· Revenue recognition

Although trading firms such as Goldman Sachs used the conventional “agent model” for reporting revenue (where only the trading or brokerage fee would be reported as revenue), Enron instead elected to report the entire value of each of its trades as revenue. This helped Enron post higher revenues as to stay competitive in the market.

Between 1996 to 2000, Enron’s revenues increased by more than 750%, rising from $13.3 billion in 1996 to $100.8 billion in 2000. This extensive expansion of 65% per year was unprecedented in any industry, including the energy industry which typically considered growth of 2–3% per year to be respectable.

· Mark-to-market accounting

In each time period, the company listed actual costs of supplying the gas and actual revenues received from selling it. However, Enron adopted mark-to-market accounting, citing that it would reflect “… true economic value.” Enron became the first non-financial company to use the method to account for its complex long-term contracts. Mark-to-market accounting requires that once a long-term contract was signed, income was estimated as the present value of net future cash flows. Due to the large discrepancies of attempting to match profits and cash, investors were typically given false or misleading reports.

For one contract, in July 2000, Enron and Blockbuster Video signed a 20-year agreement to introduce on-demand entertainment to various U.S. cities by year-end. When the network failed to work, Blockbuster pulled out of the contract. Enron continued to recognize future profits, even though the deal resulted in a loss.

· Other accounting issues

Enron made a habit of booking costs of cancelled projects as assets, with the rationale that no official letter had stated that the project was cancelled. This method was known as “the snowball”, and although it was initially dictated that snowballs stay under $90 million, it was later extended to $200 million.

In 1998, when analysts were given a tour of the Enron Energy Services office, they were impressed with how the employees were working so vigorously. In reality, Skilling had moved other employees to the office from other departments (instructing them to pretend to work hard) to create the appearance that the division was bigger than it was. This ruse was used several times to fool analysts about the progress of different areas of Enron to help improve the stock price.



On November 28, 2001, Enron’s two worst-possible outcomes came true. Dynegy Inc. unilaterally disengaged from the proposed acquisition of the company and Enron’s credit rating fell to junk status. Watson later said “At the end, you couldn’t give it [Enron] to me.” The company, having very little cash with which to run its business, let alone satisfy enormous debts, imploded. Its stock price fell to $0.61 at the end of the day’s trading. One editorial observer wrote that “Enron is now shorthand for the perfect financial storm.”

Enron was estimated to have about $23 billion in liabilities from both debt outstanding and guaranteed loans. Citigroup and JP Morgan Chase in particular appeared to have significant amounts to lose with Enron’s fall. Additionally, many of Enron’s major assets were pledged to lenders in order to secure loans, throwing into doubt what if anything unsecured creditors and eventually stockholders might receive in bankruptcy proceedings.

There are some things money can’t buy. Integrity is one of them.

They say “crony” is the only form of capitalism that works in India. This idea was repeatedly challenged by KP Singh in his autobiography ‘Whatever the odds’ which chronicles the explosive growth of a fledgling property player into India’s biggest real estate company, DLF. He writes about his perseverance despite running foul by a politician, his vision to transform Gurgaon into a boom city, his ‘doing business the hard way’ in a land of archaic laws. There are many more references of his business practices and ethics in the book.

All that came to negative light when anti-corruption activist Arvind Kejriwal alleged in a press conference on 5 October that DLF provided undue favours to Sonia Gandhi’s son in law, Robert Vadra. Kejriwal brought to light a set of documents that reveal that Vadra had received and unsecured interest free loan of Rs. 65 crores from DLF in order to buy plots and apartments at throw away prices from DLF itself.

At that time Kejriwal alleged that there must have been a quid pro quo agreement between Robert Vadra and DLF such that Vadra would have used his influence in the Haryana Government for land acquisition or something. Three days later he stepped up the attack, this time alleging that Haryana government helped DLF  land government plots, illegally raise floor area ratio (a measure of how much construction is allowed on a plot) and convert land meant for hospitals into a special economic zone.

Later what came to light that Haryana IAS officer, Ashok Khemkar cancelled the mutation (change of land use) of a 3.5 acre plot in Gurgaon citing undervaluation of the plot in the deal. Vadra bought this land for Rs. 13 crores (which he got from DLF itself) and after getting its land use changed from Hospital to residential sold it off to DLF for Rs. 58 crores. Not surprisingly land mutation which usually takes 5-6 months, took only one day for Vadra. The IAS officer cited that the land might be sold to DLF but the license to develop it was with Vadra’s company, Skylight Hospitality and hence the transfer of land ought to be cancelled. He came to this conclusion on the grounds that the price paid by DLF to Vadra was almost four times the purchase price, even though two transactions were just three months apart.

The Haryana Congress government however hurriedly issued Khemkar’s transfer order on 11 October and cancelled his order claiming he has been transferred first and his order of cancelling the deal stood cancelled. The Haryana government has set up an inquiry committee to be headed by the additional chief secretary and will have two other senior members of the state government. The inquiry has been ordered to be completed within one month.

The committee will look into the legality of actions taken by officials concerned, including acts of omissions and commissions, if any. “I think we should wait for the committee’s report. We need to investigate the matter carefully,” the chief secretary said. Lawyers who deal in land acquisitions said Khemkar’s order may not be of much consequence.

“In my opinion, this will go through as all agreements (between Vadra and DLF) have been cleared by various government departments over five years,” one of them said, requesting not to be named. But this could change, the lawyers said, if the Haryana government committee unearthed irregularities in Vadra’s dealings.

The Opposition parties slammed the transfer, saying the state led by a Congress government was investigating the actions of what they termed as an honest bureaucrat instead of “corruption charges” against the party president’s son-in-law.

Kejriwal demanded Vadra to be independently probed under the Prevention of Corruption act because of his close relations with 10 Janpath.  However the Congress Party has been fanning out ministers across television channels to Vadra’s defence citing that he is a private citizen, and his business dealings are independent of the party and the government. Law minister Salman Khurshid even swore to lay down his life for the Gandhi family. When it realised the political implication of such high pitched defence it withdrew the ministers quickly. But the damage was done, the equation was set in the public mind, Vadra = Gandhi Family = Congress. Many suggest that Vadra can be under the present law be probed under the prevention of corruption act though he is not a public servant as he owns property in Lodhi Gardens which no private citizen can be awarded.

DLF investors too faced the aftermath of the revelations with having lost  Rs. 6,921 crores since October 5 following allegations that the company has favoured Robert Vadra. Though these charges have been denied by DLF, the credibility of the company and a serious threat of an inquiry could hurt the company further, which has dropped over 17% since the allegations have been made.

Regardless of the veracity, Kejriwal’s allegations are not entirely surprising, given that real estate has long been a fount for corruption. The cosy relationship between builders and politician is well known. Even builders acknowledge that fact that real estate in India has become synonymous with bribes and black money. How so? Thanks to the many rules that govern the sector, real estate has been governed by a patchwork of regulations that promote arbitrariness in doing business and leave plenty of room for offenders. It takes approximately 57 approvals, 172 documents, and 40 municipal, state and central government departments before one can start construction, but most importantly acquiring land which is the most essential constituent of real estate, is complicated because it is in short supply and cannot be obtained without political patronage. This is what Robert  Vadra was used by DLF for, as a broker to get the land use and other formalities get done from the Congress ruled Haryana government.