Double standards

Companies should have to adhere to the same rigorous criteria for borrowing as an education- or a home-loan consumer

By Mohan Sule
Why is that success of some companies trigger skepticism, cynicism and even derision but the failure of some others evoke a feeling of shock, sadness and even sympathy? The first category comprises companies whose dizzying rise is largely due to crony capitalism rather than due to display of gut and daring, which are more likely to be the hallmarks of the second. It almost seems a travesty that the lot that has political patronage seems to be thriving merely because of the fact that the promoters have been lucky enough to be born in well-connected families, who flourished during the licence-raj regime and were favored while granting entry into the emerging sectors. Most of them hold a controlling stake, using government financial institutions and the small investors as supporting actors, to fuel their wealth, ambition and image. On the other hand are the entrepreneurs who are venturing into an uncertain landscape not to burn their cash reserves but to translate a dream into reality by circumventing government regulations, surmounting bureaucratic obstacles, convincing hardnosed private and institutional equity participants, and inspiring the small investors and consumers. Of late, both types of companies are in the news due to the renewed focus on the nexus between politicians and the corporate sector and the torturous deterioration in the health of two companies that were among the showpieces of the post-reforms era.

The hurdles encountered in the rehabilitation of Kingfisher Airlines and Suzlon Energy could compete with any Hollywood thriller for the twists and turns. After each hopeless turn of event, there appears a glimmer of hope that the two companies will get a second shot at survival, only to be dashed by complications arising from global economic slowdown and the resultant volatility in foreign exchange. The problems of the airline and the wind turbine producer can be traced to their accumulation of too much debt to grow. In hindsight, they erred not for aiming too high but in doing so on a shaky base. Though not a first-generation entrepreneur, Vijay Mallya entered the Rajya Sabha to beat the system. His high-cost, all-frills airline indeed filled up a space that arose from the rapidly expanding middle class. Tulsi Tanti set to harvest wind energy as an alternative to the pricey crude oil. Their initial success spurred them to embark on bigger gambles. Mallya’s acquisition of Air Deccan in 2007 was essential as the aviation space was undergoing consolidation to increase market share so as to gain pricing power. By then the dynamics of the industry had changed. The liquidity crunch of 2008 brought renewed focus on the bottom line of the aviation industry that was recovering from the blow of the terrorist attacks on the US in September 2001. As luxury airlines closed or were acquired in the aftermath, low-cost airlines became fashionable. Flyers changed their priority from comfort to convenience. Compounding the problem was the surging prices of aviation turbine fuel, receiving a fillip from China’s growth juggernaut. Soon after Suzlon took on cumulative debt for over US$2 billion to buy two European companies, one in 2006 and another in 2007, to achieve scale, liquidity dried up on the seizure of global financial institutions, with the euro zone particularly hit hard. Acquisitions that seemed sensible became albatrosses.

Should the two companies be allowed to fail? The licence of Kingfisher has been suspended and foreign lenders early October rebuffed Suzlon’s request for extension to redeem their bonds. It would be a pity indeed if they are not extended some sort of life-support system till the global economy turns around. In the meantime, it is time to examine how companies’ ambition to become sizeable players in their market can be tempered with reality. At the outset it is important to impress on promoters that they cannot turn their companies into world-class entities while retaining more than 51% ownership. They have to turn minority shareholders to enable institutional investors to have a greater say in capital expenditure as well as cost trimming on adverse turn of events. Any plan to raise debt more than two times sales or net profit should be approved by at least 50% of the non-promoter shareholders. The Reserve Bank of India needs to set a up a separate cell to monitor the foreign debt of companies as well as domestic lending institutions’ exposure and alert them of worrisome trends that would impact repayment. Importantly, promoters issuing debt should have adequate backup of assets or have a consortium of lenders to throw a lifeline. If the home of an ordinary borrower has to be mortgaged with the housing finance company and an education loan comes only with a collateral of equivalent value, why not create a level-playing field for companies, too?