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Collapse of Jet Airways: Larger issues need fixing

By DM Deshpande

 

After all the twists and turns the inevitable has happened; Jet Airlines has grounded all operations. The airlines last hope that the banks will bail them out did not come true; it is another matter that lead banks went back on their promise to provide a fresh lease of life to the beleaguered airline.

The main culprit in the sordid saga that Jet represents today is the promoter- in-chief, Naresh Goyal. Mismanagement at the top for years nay decades has been proved beyond any ray of doubt. Even as Jet was losing market share the costs of operations were escalating.

Just look at one parameter, quite an important indicator. The sales and general expenses at 15 to 17 per cent in Jet were way above Indigo’s two- three per cent.  Both expansion and losses meant that Goyal should have infused more equity in to the venture. He did not do it. Abu Dhabi’s Etihad Airways injected equity by buying 24 per cent stake in 2013 but that did not resolve the recurring financial problems in Jet Airlines.

Beside the promoter, banks, auditors and regulatory authorities are also responsible for the sad state of affairs at Jet. We seem to have learnt no lesson from the Kingfisher episode which wound up in 2012. At least at that time the present laws of bankruptcy were not in force. Now banks collectively could have at least threatened Goyal and if necessary converted their outstanding loans into equity.

It is not clear why banks chose not to oust Goyal earlier and create conditions for finding a suitable entity for an inevitable takeover. Or why did the banks continue to lend knowing that the airline was ailing and all was not well with its management. Shouldn’t they have limited their exposure in an industry which is highly capital intensive and prone to cyclical changes? Is it not lamentable that Goyal was allowed a free run of the airline despite it being a public limited company for 14 long years? It had virtually become his fiefdom and nobody dared to question even when the tide went against the firm.

This is where the criticism of ‘crony capitalism’ in India sticks. Till such time that political donations remain opaque there is no knowing whether the government or any other individual is trying to shield someone.

Big lenders like banks have tended depend heavily on these ‘insiders’ to fix the problem of ailing organizations. One can see a pattern in this and Jet is not the only example. What is happening with Zee Entertainment? Indian mutual funds lent heavily to media mogul Subhash Chandra against his shares. Chandra’s leveraged bets on infrastructure ran in to liquidity problems and all hell broke. Yet the funds opted by choice not to sell Zee shares in hordes.

Now these funds are telling their investors that their NAV has eroded and we are waiting for a new suitor take over Zee. And look at regulators, loans to Chandra in the name of bonds are still floating in the market with A rating!

The genesis of crony capitalism lies on how so called ‘promoters’ have gamed political masters, providers of external capital and even regulators. Nothing much will change for Goyal; for that matter hell has broken down on Mallyas, Nirav Modis and the likes. That is why it is said aptly that there are several sick companies in India but no sick promoter!

Rule based capitalism will not flourish if we leave scope for manipulation by insiders. Almost in all major business failures in India external capital providers are involved and insiders get a free pass to control large sums of tax payer money.  Autonomy of external providers of capital has to be preserved and nourished. Similarly free hand should be given to regulators to take decisions that will enforce financial discipline. They must be held accountable except in times where the error in judgment is due to an external factor, say, like change in business cycle.

With operations closed finding a new suitor is going to become tricky. No one wants to buy a company with Rs 15,000 crores debt along with what Jet can bring on the table which is some flying rights, few parking slots and a brand that is losing value quickly. There will be some hard bargaining but it should best be left to market forces to act and resolve the current impasse.

 

*The writer is in the field of higher education- teaching, research and administration for nearly four decades. Presently he is the Vice Chancellor of ISBM University, Chattisgarh.

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