Did lenders flout rules while pledging the KFA brand for loans?
The move to pledge the Kingfisher Airlines brand with IDBI Bank to raise around Rs 900 crore has raised questions since this is not a common method for lenders to extend loans, as intangible assets do not offer a clear estimate of future cash flows.
The development has also fuelled suspicion that prudential norms were not followed in the pledging of the brand as collateral, prompting the CBI to include this aspect in its probe on whether norms were deliberately overlooked while extending loans to Kingfisher Airlines (KFA).
While IDBI Bank and KFA did not comment on the issue, a senior official with a public sector bank said: “Brand as a security is not regularly accepted by banks for extending loans. While sanctioning working capital loans for a functioning firm, primary security is the only pledge and collateral is only an additional security.”
Primary security is in the form of stocks and book debts, and the security requirement is based on risk perception of the official evaluator.
“There are various parameters that are followed in evaluating a brand, with its potential in determining future cash flows, being the most important,” said Darshana Kadakia, partner, valuations with Grant Thornton.
While it is reported that Grant Thornton did the valuation for Kingfisher Airlines brand, a spokesperson did not comment citing client confidentiality.
It has been reported that IDBI Bank had lent about Rs 900 crore on the Kingfisher Airlines brand, quite high compared to other such cases. Also, in 2012-13 when the loan was extended, the airline had started making losses.
“If one were to consider an example, during the sale of Wockhardt’s protein business to Danone, during the same time period, the total valuation of the deal was pegged at Rs 1,500 crore, of which the brand valuation was Rs 250 crore. Wockhardt was a profit-earning company,” said an auditor who inspected Wockhardt’s books.
Mallya owes around Rs 7,000 crore in dues to a consortium of 17 lenders led by SBI.
According to another auditor, banks take a risk by extending loans on a brand. “In a construction company, you may have a right to collect toll for 30 years. That also is an intangible asset, but at least there is a visible project on hand. Here that is not the case.”