A probe by the Serious Fraud Investigation Office (SFIO) has found that “all corporate ethics were compromised” in the merger between Vijay Mallya-controlled Kingfisher Airlines Ltd (KFAL) and Deccan Aviation Ltd (DAL). According to the SFIO report, Kingfisher Airlines created new divisions with backdated book entries to avoid taxes, paid a Rs 30 crore non-compete fee to DAL founder Captain G R Gopinath without disclosing it to stakeholders or the high court, and carried out “circular transactions” worth Rs 70 crore between UB group firms and entities controlled by Gopinath.
The SFIO has found that Kingfisher created three business segments — commercial airlines, ground handling and training — on paper after announcing its merger with DAL to avoid paying capital gains tax. Tax norms stipulate that distinct divisions should exist in a “demerged” and resulting entity prior to the demerger in order to be exempt from capital gains tax. In this case, Kingfisher’s airlines operation was to be demerged into DAL, which was subsequently renamed as Kingfisher Airlines Ltd. Captain Gopinath has, however, said that he was a minority shareholder in DAL and the merger had gone through with the requisite regulatory approvals.
The SFIO has said that “documents were backdated and fabricated to show that there existed three business divisions/ segments.” The fraud office has recommended that the investigation details of the merger be shared with the Income Tax department for possible violation of the Income Tax Act and to recover tax payable, if any.
The SFIO has also said that Kingfisher paid a Rs 30 crore non-compete fee to Gopinath without disclosing it to shareholders or the high court when the scheme of arrangement for the merger was filed. It has said this fee was given to Gopinath to get him to agree to the deal.
According to the SFIO, Gopinath used this money to purchase one crore shares in Kingfisher Airlines Ltd through a company he owned. Subsequent to the merger, Gopinath’s one crore shares (like all other shareholders) were converted to around 42 lakh shares of the merged entity. At the time of the merger, these shares were valued at around Rs 87 crore. SFIO terms this as “windfall gains” accruing to Gopinath.
“All corporate ethics were compromised in this transaction as payment of non-compete fee to GRG (Gopinath) and allotment of shares in erstwhile KFAL (Kingfisher Airlines) were never disclosed to the stakeholders at the time of seeking consent for merger of DAL with erstwhile KFAL. GRG and VJM (Vijay Mallya) conspired for their individual gains and in the process material facts were concealed. This transaction being an integral part of the demerger process should have also been made part of the scheme of arrangement filed before the High Court of Karnataka,” said the SFIO report.
The SFIO has recommended to the Ministry of Corporate Affairs that several people directly involved in the transaction be charged for offences such as criminal conspiracy, cheating and forgery under the Indian Penal Code.
In an emailed response, Gopinath said he was a minority shareholder at DAL and the merger went through with requisite regulatory approvals.
“When Mr Vijay Mallya invested in Air Deccan, I was already a minority shareholder with less than 15 per cent shareholding. Air Deccan was a listed company with reputed domestic as well as foreign institutional investors like ICICI and Capital International who were represented on Air Deccan board along with other independent directors. After Mallya’s investment, I was further diluted and Air Deccan came under his management control as he became the largest shareholder,” said Gopinath.
He said that when the merger was proposed at the board meeting between Kingfisher Airlines and Air Deccan, he was the only one who opposed it, in the board and in public too.
“As the other investors and board members saw more value in pitching their fortunes with Mallya’s glamorous full service model than with my low- cost no-frills model, I was in a minority and the merger proposal sailed through,” said Gopinath. While many investors including ICICI sold their shares, to Mallya, his affiliates and also in public, for very good returns and exited Air Deccan and the board, he said he was in a “hopeless minority.”
“I received Rs 30 crore through a cheque, from Kingfisher Airlines Ltd, which was then a private company, before merger with Air Deccan that was a listed company, as a non-compete fee binding me not to start an airline for five years as Mallya feared I would start an airline. In hindsight, unwisely, I used that amount to buy Kingfisher shares so that after merger my dilution would not go down below 10 per cent. (I wish I had sold the shares and made a fortune as surmised in your question. I was a promoter and the law barred me from selling my shares for three years. When I could sell them and did sell them, it was too late as Kingfisher shares had collapsed because of huge losses in the airline),” Gopinath said in his email response.
A spokesperson for Mallya declined to comment.
The SFIO has also alleged that Mallya, the UB Group and entities controlled by Gopinath indulged in “circular transactions” by rotating Rs 5 crore 14 times to generate funds in the books of Deccan Charters Ltd and associated entities. Deccan Charters Ltd was created by renaming Kingfisher Aviation Training Ltd to buy the chartered services business of DAL after it acquired the airlines business of Kingfisher. According to SFIO, these circular transactions were done to complete the payment due from Deccan Charters Limited to the merged Kingfisher Airlines.
“As I had no control over running either Deccan Aviation or Kingfisher Airlines Limited, I’ve no knowledge of how various payments were made and if Mallya had resorted to round-tripping. Whether there were violations of regulations and disregard of compliance norms or if there were misdemeanors, and collusion with bankers or ministers and bureaucrats or others, only the courts can decide. The merger proposal was handled by a battery of legal experts, international auditing firms by Kingfisher Airlines which acquired Deccan Aviation, which he controlled through what’s called a reverse merger,” said Gopinath.
“Apart from any allegations and charges of wrongdoing against Mallya, which are under investigation and prosecution by various agencies, the merger and demerger and amalgamation scheme was in total compliance and was approved by the Honourable High Court of Karnataka after a due process, and only after all shareholders and an eminent star-studded board of directors, which comprised a former finance secretary and a former SEBI Chairman among others, and especially after all the banks and vendors and lessors of aircraft voted in favour of a court monitored ballot approving of the same,” said Gopinath.
“Besides, the high court had put out a public notice giving sufficient time under the statute, calling for any objections from the public and all shareholders. Anyone could have come forward and objected or called for additional documents. No one did, except some central government agencies. The SEBI also gave its consent. The high court judgment was passed after taking all the above into consideration,” he said.