Why Bringing Vijay Mallya To Book Is Vital To Making Indian Capitalism Credible

Proper running and creative destruction have to happen to help capitalism regenerate itself

If there is a really bad advertisement for capitalism and market economics, it must be Vijay Mallya. Businesses fail, and no one needs to lament the fact that Mallya made a hash of his investment in Kingfisher Airlines, especially after his ill-fated acquisition of Air Deccan. He got his strategy wrong, his finances wrong, and most other things wrong too. But what he got right was his belief that someone else will bear the cost of his failures. He is having a ball while banks are left holding his baby.

This is exactly what is wrong with Indian capitalism. It has been captured by cronies. If capitalism rewards success, it must also penalise failure, but that is what our system manifestly fails to do. Consistently. Which is why making Mallya pay for his mistakes is more important for Indian capitalism than funding a million new start-ups.

To put it simply, Wind-Up India is as important as Start-Up India.

If the Dharmic order is maintained by the Brahma-Vishnu-Mahesh trio, roughly standing for creation, maintenance and destruction, capitalism cannot work if we only worship Brahma – the creation of companies. Proper running and creative destruction have to happen to help capitalism regenerate itself. But Mahesh is Awol, and Mallya is off the hook.

Few people can thus disagree with Reserve Bank of India Governor Raghuram Rajan when he lamented the other day that “if you flaunt your birthday bashes even while owing the system a lot of money, it does seem to suggest to the public that you don’t care. I think that is the wrong message to send. If you are in trouble, you should be cutting down your expenses.”

It is unlikely that Rajan was railing against conspicuous consumption, though that is certainly a social issue in India. What he was indirectly referring to, though he did not name him, was to the fact that Mallya owes banks more than Rs 7,000 crore, and if he is genuinely unable to repay that money despite giving banks so many personal guarantees, he is basically cocking a snook at the system by celebrating his 60^th birthday with great ostentation.

Mallya has used every trick in the book and many outside it to evade his responsibility to repay banks.

First, there is little doubt that banks were under pressure to keep on lending to him, or else there was no reason why they should have continued lending to him when it was manifestly clear that Kingfisher could not earn a return by mid-2011

That there must have been pressure to help Mallya should be obvious from who got out: private sector ICICI Bank, which too made a mistake with Kingfisher, sold its entire debt of Rs 430 crore in 2012, when the writing on the wall was clear. Not so the public sector banks. Why didn’t they act to protect their interests? Why are they still stuck with Mallya’s bad debts in 2016?

Second, even when it was clear that Kingfisher will default – and default big – Mallya knew that the court system could be gamed to evade repayment obligations. Thus when the United Bank of India, one of the weakest banks in India, gathered courage in its hands and declared him and three of his former directors a “wilful” defaulters in 2014, the Calcutta High Court had no difficulty in letting Mallya get away by using a simple technicality in the law. And what was this technicality? It seems that the internal committee within UBI which took the decision had four members instead of three.

Hear what the court said: “The (UBI) identification committee held a meeting on May 22, 2014, to identify constituents as wilful defaulters. It was constituted by four members – one executive chairman, a chief general manager and two general managers. This is in excess of the number of three personnel prescribed in regulation 3(i) of the master circular on wilful defaulters issued by the Reserve Bank of India (RBI). In such circumstances, the decision arrived at by the identification committee is a nullity.”

In other words, the extra member, possibly added in order to make the UBI action seem less arbitrary, was used to let Mallya off on a technicality.

While it is no one’s claim that Mallya is the only Indian businessmen to make a mockery of India’s lack of a bankruptcy code, he is clearly a fit case for concerted action.

It would send a salutary message to all of India’s crony capitalists if the entire might of the Indian state and its agencies, including the banks to whom Mallya owes big money, is thrown into the fight to get the money back. Mallya is not poor. It is the response of the crony state to his brazenness which is poor.