Don't spend more than you earn

Voices Monday, May 04, 2015 - 05:30
No More The King Of Good Times   When the late Indian Prime Minister Indira Gandhi declared a state of emergency in the country in 1975, she asked her staff to compile a list of India’s richest people. Among the names was that of a man called Vittal Mallya, someone not many had heard. “Who is he,” she is supposed to have asked of this enormously wealthy person. That is how Vittal Mallya wanted to be, rich and successful, but unknown.   People who knew him say the late Vittal Mallya had an uncanny ability to read balance sheets. Like a butcher who knows where the meat is bad, he spotted hidden losses and padded profits instantly. It was this penchant for numbers that led him to play the stock markets and invest in companies while at university. At 22, Mallya was elected as United Breweries’ first Indian director in Calcutta and a year later became its chairman. He migrated to Bangalore from Bengal and diversified his portfolio by acquiring food and pharma companies. His sudden death following a heart attack in 1983 meant his  28-year-old son Vijay Mallya inheriting a sound and successful business, but as time would show, not much of the father’s wisdom, financial sense and focus   Now as pitched boardroom fights seem daily staple for the man who calls himself the King of Good Times, the most serious threat for Vijay Mallya comes from the liquor company Diageo which has acquired majority stakes in United Spirits Limited (USL). Shorn of legalese, they want Mallya out of the boardroom till accounts are cleaned up.   Vijay Mallya’s lack of focus and inability to grow a thriving business were not apparent immediately as he embarked on a buying spree adding Berger Paints (which he spun off later), Best and Crompton as well as global liquor companies like Whyte and Mackay and Liquidity Inc. Nothing was too big for him, no frontiers were forbidden in his quest for power and glory, but he seems to have forgotten one thing called domain knowledge. He also seems to have forgotten that at the end of the day or month accounts have to be submitted. What went wrong?   Perhaps one investment succinctly captures the rise and fall of Vijay Mallya. He offered himself a Formula One team which he called Force India. What was he selling and where was the return on investment in that expensive business? Nearly all formula one companies are in the automobile business either directly manufacturing cars or supplying technology and engineering. Ferrari, for example, sells some 500 road cars per year, but invests millions in a race car that builds the brand. Good times cannot be sold as a brand and that is where the emperor started to appear naked.   Prior to Force India, Mallya had bought himself a yacht which was parked in Cannes on the French Riviera. From there the world saw photographs of Mallya and his friends living the high life while his airlines Kingfisher closed shop and the wife of an employee committed suicide as she was unable to make ends meet. In 2012, the unprofitable Kingfisher was grounded while on the other side, there were boardroom battles for one of Mallya’s earlier acquisitions the Mangalore Chemical and Fertilisers (MCF). Last October Mallya pushed for controlling stakes in the Rs.3, 700 crore ($586 million) MCF.   The cash cow of the business empire – United Spirits Limited (USL) – wants Mallya out. Is this man a compulsive loser, a consummate actor or both? As allegations fly deep and far, he has been sighted in Davos and London flashing a new hairstyle and large diamond earrings. But the bad news continues and Diageo may well be his Waterloo.   When the global alcoholic beverage company acquired majority stake in USL, their first call was to Mallya to step down till an internal enquiry was completed. The company owns some of India’s biggest alcohol brands, including Royal Challenge, and currently controls around 40 percent of the Indian-made foreign liquor market (IMFL).The IMFL market is estimated to be around 70 percent of India’s total liquor market which is worth Rs.30,000 crores or $4.7 billion. That kind of money and shoddy accounting do not go together.   In a statement last week, Diageo said it had received three reports from USL which point to alleged irregular financial transactions involving the Mallya UB group companies and other individuals. “Subsequent to its announcement on April 25, USL has provided its inquiry report and all related materials to Diageo. Diageo notes the recommendation of the USL board and will now consider its position under its agreements with Mallya and United Breweries Holdings in the light of the inquiry report and materials provided to it,” the statement said.     Mallya now says only the shareholders can oust him but financial experts say he  must step down from the board till the recent allegations of financial improprieties—and the cloud over his being named as a wilful defaulter over Kingfisher Airlines—are cleared. Market watchers say the final nail in the coffin was Kingfisher acquiring Air Deccan in 2007. Huge debts followed and within five years, the company packed up. Some banks declared that the company was a willful defaulter to the tune of Rs. 7,500 crore or $1.2 billion, but Mallya is contesting that claim. Mallya was a two-term Rajya Sabha MP from Karnataka and was a member of the committee that decided on India’s aviation policies. As allegations piled up, so did his acquisitions. A football club in Calcutta, a formula one team (reportedly for 60 million euros) and finally an Indian Premier League (IPL) cricket team Royal Challengers Bangalore for $111.6 million were the newest acquisitions.   Diageo has dug in its heels. In its note, the company has said “Dr. Mallya has been defiant saying he has a contractual agreement with Diageo to hold his position on the board. But Dr. Mallya forgets that directors have a fiduciary responsibility towards shareholders and the company itself…a board position cannot be a goal in itself. It must serve the interest of the company and its stakeholders. Therefore Dr. Mallya must ask himself – does fighting to stay on the board serve the company or its stakeholders at this stage?”   For someone not used to being accountable literally and all else, that may not seem like a slap. The next few weeks will show which way the wind turns, but all signs point to bad weather for India’s self-proclaimed King of Good Times. It doesn’t take a genius to understand that if you spend more than you make, the money will run out fast. In such circumstances, it does not help to be an in-your-face show off. 
Become a TNM Member for just Rs 999!
You can also support us with a one-time payment.