De-Lurking on the Net

June 11, 2016

Fixing capitalism – Will taking away, knighthood from Mr Green prevent another BHS?


From India, recently, Britain gave refuge to a liquor tycoon, Mr Vijay Mallya. He had multiple companies including an airline. The company was extended loans from Indian Banks (State owned and Private) when the petrol prices were double than what is today. The company kept getting loans because without it massive unemployment would be created. Moreover, the man, Mr Mallya had political connections and he himself was a member of Indian parliament’s upper house. These loans were given to his airline company without any collateral support or risk assessment. So, this man sold his other main company to British company Diageo. He flew out of India, without paying anything to banks . Now banks are holding merely the brand name of bankrupt company Kingfisher as a collateral. But, no one is interested to buy this name. Banks now can not recover anything of this 1.4 billion dollars debt. Mr Mallya, from his safe abode in UK wants to settle these debts at his own terms (say around 55 %  haircut)  as per this article in FT GOI has cancelled his passport and he has been given refuge in UK. It was clear from CBI investigation that this man was diverting loans from banks for buying assets abroad. He was also running a formula 1 team, an IPL franchise, two football teams etc.

Kingfisher Airlines Chairman Vijay Mallya speaks to the media during a news conference in Mumbai November 15, 2011. REUTERS/Vivek Prakash/File photo

Kingfisher Airlines Chairman Vijay Mallya speaks to the media during a news conference in Mumbai November 15, 2011. REUTERS/Vivek Prakash/File photo

Giving refuge to runaways like him is not a one off event. In 2010, there was another chap on these British Isles given refuge from India – Mr Lalit Modi. He was the czar of Indian Cricket Premier League for first 3 years. He diverted money in  various accounts overseas, bought assets abroad etc. There are many charges in this wiki page on LalitModi. So, Britain is good for fugitives as these people are given special protection by the British crown and are beyond repatriation.

One can understand, if British only overlooks the deeds of those who come from outside but how about the ones, who were very much part of this land from first day, they were born. The debacle of Royal Bank of Scotland was far more profound than the current crisis of BHS (British Home Stores). BHS owes 1.1 billion pound at the point, it  entered administration. RBS needed bailout of £45billion  in year 2008 when the British chancellor was told that the bank can only last 2 to 3 hours max. Both Mr Fred Goodwin and Philip Green were given knighthood.  The telegraph is publishing one article after another revealing gory details of current financial crisis in BHS as how Mr Philip Green did the asset stripping and lined up his pockets before selling the shell to a novice in retail business for one pound. While Mr Goodwin is now stripped of knighthood, but the debate is on if Sir Philip Green should follow. But should the debate be reduced to the knighthood. It will do nothing to correct the mistakes of the system which allows this.


Sir Philip Green

Before, these two episodes, there have been plenty others, but I will mention two related to famous football clubs – Liverpool and Manchester United. Both did not have any debt some 10 years back. Manchester United ‘s current debt is £322 million, its turnover is £133 million. The peak  debt as per this BBC report was £778 million in 2010 summer. So, this debt is going down at least. The Liverpool has quite a similar tale. From no debt to £313 million debt as per this guardian article in 2009. Liverpool has current debt is £47 million as per this article of daily mail after it has converted £69 million debt into equity last year. So, both these clubs are moving in right direction with having reduced debt every year. But the question is should a personal debt (to buy the debt free club) of an owner be allowed to be moved to the company. Where should the line be drawn. There are plenty of stories where the debt has sunk a club. Leeds Football Club is a good example of that.

 But does it not make one wonder how in the land where industrial revolution took shape and capitalism was born, the rules even today allow anyone to pocket any money from any company, only if they know how to play the game. The state has no control to prevent the plight in time. In case of RBS, the whole country (UK) suffered as the govt or tax payers had to rescue the bank. UK suddenly found so much in debt after all these mega bank rescues after recession started since 2008. In the present case of BHS, the plight certainly hinges on to the massive job losses and depleted pension funds of employees. Asset stripping to fill your pockets has still not disappeared . Movies have been made on this. So, how to prevent unscrupulous creatures exploiting the system while everyone else languishes? Perhaps, company law needs amendment. Could these be the solutions to prevent the owners from taking advantage –

  • The working capital should not be allowed to be touched.
  • Only a certain percent of retained profits be allowed to be withdrawn
  • It must be a rule that auditor and board be involved in a withdrawal bigger than a particular ceiling
  • A ceiling must also be placed to withdraw more than the capital injection done by any owner/investor
  • The shifting of individual loan onto company books must not be allowed

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