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From Kingfisher to Jet - Same story of mismanagement by all stakeholders

 

APRIL 20, 2019

By TIOL Edit Team

THE total suspension of all flight operations by Jet Airways (JA's) is a cause for deep concern. It shows stakeholders - from promoters to policy makers - have learnt no lessons from Kingfisher Airlines (KA) grounding. It also underscores the need for separate oversight framework for over-leveraged service companies.

JA's as well as JA group's net worth was totally negative as on 31st March 2018. Auditors flagged this issue. And yet promoters, lenders and the Government jointly let JA go through turbulence before nose-diving to a complete halt.

This marks the failure of three-year road map for JA's turnaround drawn in 2014. Should complete erosion of net worth of any company not serve as a wake-up call for all stakeholders?

Should such erosion not be made a statutory trigger for sending a company under the corporate resolution framework? The least regulatory authorities can do is to ask such companies to disclose how the management intends to bring back them from brink of disaster.

Under the erstwhile Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) that was repealed in December 2016, it was mandatory for a manufacturing company to register with erstwhile Board for Industrial and Financial Reconstruction (BIFR) after erosion of 50% net worth.

SICA didn't have any provision for registration and revival/closure of sick service companies. Had there been provision, KA would have got itself registered with BIFR and received a bail-out package. Such packages have been regularly extended to telecom service operators right from NDA-I to UPA to NDA.

Reverting back to JA crisis, lenders led by State Bank of India (SBI) should have explored all options to save the money they lent to JA in the first quarter of 2018-19.

They should have asked promoters to infuse up front funds as fresh equity and personal loans. They should have goaded JA to focus on consolidation & not expansion. They should at least now announce Lakshman-Rekha against fresh borrowings by setting debt-equity ratio for airliners.

Turn now to the role of Government in JA crisis. It must disclose all facts that led it to delay and finally reject JA's merger of its wholly owned subsidiary Jetlite with itself.

About two years after Bombay High Court approved the merger, Ministry of Civil Aviation (MCA) rejected it in April 2018. The merger would have helped the company reduce its operational efficiency and cut operational costs.

The Government has not yet closed a forex violation notice filed against Jetlitein 2002 when it was operated by Sahara group as Sahara Airlines limited (SAL). The notice was issued under the now repealed Foreign Exchange Regulation Act (FERA) for signing an aircrafts purchase agreement without prior approval of Reserve Bank of India. SAL did not implement this 1995 agreement. Later, the notice was stayed by a high court. This is where the matter stands.

This speaks volumes about much-hyped improvement in the ease of doing business.

On the larger turf of easing unfavourable business environment for airlines, the Government belatedly reduced excise duty on aviation turbine fuel (ATF) by 3% to 11% in October 2018. ATF is still very expensive due to heavy taxation by States.

Modi Government should have worked to bring ATF and other petroleum products under Goods and Services Tax to make aviation business viable.

The Government also should review its bias towards airports at the expense of airlines. The bias is reflected in empowering airports to levy several exorbitant imposts on airlines and its customers.

Turn now to the deplorable role played by the promoters. JA would not have grounded had its promoter Naresh Goyal agreed to give up controlling stake to potential suitors, notably Tatas, in 3rd quarter of 2018.

A merger and acquisition deal with Tatas would have saved JA as a going concern.

Mr. Goyal reportedly resisted giving up management control till JA was reduced to a skeleton.

This prompted lenders in March 2019 to draft a resolution plan to convert debt into equity. The conversion has not yet happened or else it would have been reflected in JA's latest shareholding pattern disclosed to stock exchanges on 17 th April - the day it decided to suspend its truncated flight operations.

Lenders should clarify whether and when they would convert their loans intoequity as envisaged by resolution plan. This clarity is needed from standpoint of holding promoters accountable when JA is left with no option but to undergo liquidation.

The Banks-led Resolution Plan also provided for resignation of Mr. Goyal from the Board of Directors. He did resign on 25th March. The lenders, however, did not proceed with interim Rs 1500 crore funding to facilitate sale of controlling stake through competitive bidding unveiled on 8th April.

All eyes are now on the bidding. Latest news reports suggest that bidders are asking lenders to forgo 80% of reported Rs 8700 crore debt.

As in case of KA closure, JA staff has been left in lurch with unpaid salaries for several months. So is the case with unsecured lenders.

Such analysis should induce the Government, lenders and airline companies to work out holistic reforms. The policy and regulatory reforms should provide for timely closure or management change of unviable entities such as Air India (AI). The Government has pumped thousands of crores in perennially sick AI, thereby spreading secondary sickness in airline business. Enough is Enough.


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