Sunday, April 21, 2019

Management and Regulator Failed Jet Airways

The way Jet Airways is down, it confirms that history repeats itself. However it is temporarily down but there is a rare possibility that it would ever be back in the air again. It seems that Jet Airways would have the same fate as of the Kingfisher’s. In the similar fashion, Kingfisher was temporarily brought down by the Directorate General of Civil Aviation in 2012 and it could never fly back in the air. And the reasons were the very same; unsustainable huge amount of debt in the books of account. 

Jet Airways is debt ridden and unable to even service the debt. Being a full-fledged airline, it has very high operational costs. Apart from this at present there are no pilots to fly its planes as it has failed even to pay salary to its staff for long. Also, the lenders have already declined to provide with the emergency fund of Rs 1,200 crores even after giving verbal assurance for the same. And there are rumours in the air that employees are planning to go to court to recover their dues. These circumstances altogether make it even more difficult for Jet Airways to hit back in the air. 

After many incidents of defaults on meeting liabilities on many occasions, the bankruptcy of Jet Airways looks to be an utmost possibility. If the bids of 10th May 2019 are not accepted by lenders, they would move to National Company Law Tribunal (NCLT) for insolvency proceedings under Insolvency and Bankruptcy Code (IBC) 2016. And Coming back from that point would be almost impossible for Jet Airways until and unless the promoter Mr. Naresh Goyal infuses huge amount of equity to save the airlines and looking the previous records, it looks almost impossible that promoters of the company would infuse that much of money in a falling airlines that too in a sector that is going through very difficult phase. 

The fall of Jet Airways would not only make more than 20,000 employees jobless but also raises question on the sustainability of already struggling aviation sector in India. The fall of Jet Airways is second such incident after Kingfisher Airlines in 2012. It would have long term consequences for Indian aviation industry which is already turning through transition period as it is in dilemma and not sure which model (low cost or full-fledged) of operation it should opt for. In recent times the profits of a few profitable carriers like SpiceJet and Indigo are continuously falling and the remaining carriers are already in losses. This clearly indicates that on overall, the aviation sector is not in good health. A careful look in the incidents over a few decades in the industry clearly indicate that the reasons for the problems in aviation sector are not only limited to the operational strategies of these carriers but also the government’s policies on fuel pricing and maintenance charges imposed by the Airport Authority of India. Besides these there are many other questions which have been unaddressed for long ranging from capital restructuring to corporate governance to roles and responsibilities of independent directors. 

The issue of Jet Airways is not just about a company or aviation sector but it is a specific issue of regulatory failure to ensure good corporate governance practices. And surprisingly this trend is not just limited to aviation sector. It plagues all over and is continuing since long in most of the default cases. Moreover the statuary committees of the company which are expected to take right actions seem to be not working efficiently. Independent directors failed to ring bell. Ministry of Corporate Affairs and Ministry of Aviation along with AAI could not check whether its policies are working well for industry or not. These altogether need to be addressed. And this should be done as soon as possible. 

Besides these, there is need to check the way financing is done in the industry. Capital restructuring has been a common practice in banking and financial industry to deal with NPAs. Also there is a practice of converting debt into equity. Specifically these two practices seem to be the cause of the problem of big ticket default in most of cases. It has been witnessed that capital restructuring is done a number of times which eventually increases debt amount on the books of account of these distressed companies. This practice cleans the books of banks and financial institutions in short term but in long term gravitates the problem as the unsustainable debt on books of the firms forces the firms to fail on servicing debt. In fact this practice in most cases is like window dressing. The same happens with equity conversion. Banks and financial institutions convert debt into equity of distressed firms. This practice also cleans the books of banks and distressed firms. As a results the liability of these firms fall in short term but this does not provide a long term solution. 

In both the cases, the falls of distressed firms have huge costs for the economy and banking and financial institutions. And in case public sector banks, the costs have to be borne by the public exchequer. These two things particularly need to be addressed by the Ministry of Finance and Reserve Bank of India. There should be a clear mandate on capital restructuring and for that there is need for a professional agency to do that either in form of advisory or regulatory role under RBI. In case of equity conversion, banking and financial institutions should be completely banned from such practices. For such activities there should be some professional agencies which should be involved in this business than banks and financial institutions. This will transfer the risk from banking and financial institutions to specialized agencies which could be better to deal with such risks. These two things on overall will bring down the risk in the economy as well and the incidents of defaults can be effectively brought down. 

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