The second day of Vijay Mallya’s defence arguments against India’s attempts to secure his extradition continued on Thursday, as Paul Rex, a banking sector expert, who had previously testified for the State Bank of India in proceedings against the BCCI in the late 1990s, took 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 that followed consistent attempts to revive the business, and challenging the government case 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 Mr. 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 Ms. Montgomery. “It’s hard to see how that works under any circumstances,” Mr. Rex responded.
The defence then sought to challenge the arguments around misrepresentation, 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.
Ms. Montgomery drew attention to sections of SBI reports, including those that highlighted the potential for the company going forward, despite its poor earnings, particularly centred around policy changes on foreign investment in the sector and importing aviation fuel, which could cut costs.
He concurred with Ms. Montgomery’s contention that even as late as February 2012, an SBI analysis – given to the RBI (which they argued highlighted its significance 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, which remained high despite the company’s current earnings at the time.
“On the basis of the company’s earnings record and its balance sheet, 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 and this suggested a certain expectation of earnings in the future. “They weren’t simply looking at it in a break-up basis, which they wouldn’t do if they thought the company had no future.”
The witness also dealt with the issue of brand valuation, which had arisen in the prosecution case as an instance of misrepresentation. Ms. 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 Mr. Rex. “No I wouldn’t say so…it’s better to have a brand than not have the brand because you take all security that is available…but it’s not the same as saying you assume the brand will be worth X.”
Ms. 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 Mr. Rex. He also noted that such personal guarantees did not stop a person moving around or disposing of assets.
Ms. Montgomery also sought to question the decision by the consortium of banks in March and April 2016 to repay up to 80% of the ₹5,000 crore of liabilities. “It is likely to be seen as an attractive option,” Mr. Rex told the court, highlighting how with a loan in default for many years a bank was likely to have made provisions in terms of write downs, and was therefore likely to welcome such an offer and change to minimise losses.
Ms. Montgomery also sought to raise questions about whether political motivations may have been involved. “They tend to be more susceptible to political pressures,” Mr. Rex told the court when asked if it were possible to identify broad differences between State-owned and private sector banks.
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, it sought to highlight how he had made misrepresentations to secure that loan, had not used the money in the way stipulated, and that he had finally 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.
