The second day of Vijay Mallya’s defence arguments against India’s attempts to secure his extradition continued on Thursday. Paul Rex, a banking sector expert, took to the stand, building on the key theme of the defence — challenging the government’s narrative of fraud, by positing it being a case of business failure or that the banks were deliberately misled.
During a lengthy and technical session, lead defence barrister Clare Montgomery sought to challenge different planks of the government case, including that Mallya sought the loans from the consortium of banks for his gain. “On the premise that you have an equity stake in a company that is going to fail...is going and borrowing a large sum of money from the bank backed by your personal guarantee an efficient way of reducing your exposure to loss,” asked Montgomery. “It’s hard to see how that works under any circumstances,” responded Rex, who had in the late 1990s testified for the State Bank of India in proceedings against the BCCI.
The defence then sought to challenge the arguments around mis-representation, highlighting various reports from the State Bank of India on the financial health of Kingfisher Airlines. Describing the SBI as one of the most “reputable and competent” banks, he noted the influence its assessment was likely to have on others within the sector, and other banks pitching into a large loan. Montgomery drew attention to sections of SBI reports, including those that highlighted the potential for the company going forward, despite its poor earnings, particularly centered around policy changes on foreign investment in the sector and importing aviation fuel, which could significant cut costs.
He concurred with Montgomery’s contention that even as late as February 2012, an SBI analysis – given to the RBI (which they argued highlighted its significant and gravitas) suggested the company was making “every effort “ including the “infusion of substantial funds” to improve performance, under a situation in which it faced “severe constraints” including around policy.
He also noted the company’s market capitalisation, during the period under question, remained high despite the company’s current earnings at the time. “On the basis of the company’s earnings record and its balancesheet, in different circumstances one might have expected the market value would be close to zero but Kingfisher Airlines still had a significant market capitalisation,” he said, which he suggested a certain expectation of earnings in the future. “They weren’t simply looking at in a break-up basis, which they wouldn’t do if they thought the company had no future.”
Brand valuation
The witness also dealt with the issue of brand valuation, which had arisen in the prosecution case as an instance of misrepresentation. Montgomery sought to portray a more complex picture of the role the brand valuation would have had in the loan sanctioning process, as well as the bank’s recognition of how brand value would vary dependent on profitability. “Is there anything to suggest the acceptance of a brand value of ₹2,500 crore is an obviously fraudulent or misguided decision by the bank,” she asked Rex. “No I wouldn’t say so…its better to have a brand than not have the brand because you take all security that is available….but its not the same as saying you assume the brand will be worth X.”
Montgomery also criticised what she suggested was a change of tune by the prosecution, in its response documents, from overestimating to underestimating the value of his own personal guarantee. She also sought to challenge the government’s depiction of the role the personal guarantee played in the bank’s decision-making process: they ensured the guarantor (if a significant shareholder) didn’t walk away from the business but was not a panacea, said Rex. He also noted that such personal guarantees did not stop a personal moving around or disposing of their assets.
The long-awaited extradition hearing commenced on Monday, as the prosecution led by barrister Mark Summers sought to establish a three-pronged case of fraud. Focussing on a loan made by IDBI as part of a ₹2,000-crore loan by a consortium of banks in 2009, they sought to highlight how he had made mis-represenations to secure that loan, had not used the money in the way stipulated, and that he had final sought to squirrel away the funds. The case has focused on the original fraud charges rather than the money laundering charges subsequently added. The case continues at Westminster Magistrates Court until December 14.