As the chances of Vijay Mallya coming back to India and helping his debtors find a way to recover the dues from him and entities still run by him are presently looking dampened and it appears that things may not improve for the debt-ridden Kingfisher Airlines (KFA), the question that remains is, what would happen to all the shareholders of KFA? Well, the purpose of this article is to find out what will happen in current scenario to shareholders of the company.
Occasionally, publicly listed companies go bankrupt. When a company goes bankrupt, its shareholders (who are considered part owners of the company) may or may not get anything. When a company goes bankrupt, depending on the nation of domicile and the labour laws, any remaining cash and cash generated from sales of assets generally is utilised for paying creditors in the following order:
1. The government, for taxes.
2. Severance and retrenchment benefits, for staff.
3. The banks and similar creditors, for loans.
4. Suppliers and vendors to the company.
5. Bondholders.
6. Preferred shareholders.
7. Common shareholders.
As is evident, by the time the shareholders get their turn, the table has been totally cleaned off. In fact, most of the time, by the time the suppliers and vendors get their turn, they have to settle for pennies on the dollar.
As Vijay Mallya led KFA’s shares were suspended in December 2014, more than 2 years after the carrier met the same fate, the entire promoter shareholding (8.54 per cent) of Kingfisher Airlines has also been frozen.
Trading in KFA was suspended on December 1, 2014 for violation of listing rules of the stock exchanges. According to the rules, if a company fails to report its earnings for two consecutive quarters, its shares have to be suspended from trading. The company has not reported its quarterly earnings since the December quarter of FY14.
Investors, who have not sold their shares till that time, still have a chance to do so. As per exchange rules, trading in non-compliant companies would be allowed on a trade-for-trade basis, 15 days after the suspension. Trade-for-trade is a type of settlement system, where transactions can be done only for delivery. Under the trade-for-trade segment, each transaction is considered individually and the normal rolling settlement system does not apply.
Trade-for-trade settlement prevents brokers from circular trading, a fraudulent scheme used to increase share value and volumes, to attract unsuspecting investors. Circular trading does not lead to a real change in the ownership of the stock. Circular trading is not possible in trade-for-trade settlement as brokers have to pay for each transaction (buy or sell). So, only genuine investors will be able to participate in the trade.
Shares under trade-for-trade are traded on the first trading day of every week for six months. The first trading window for Kingfisher Airlines under trade-for-trade window opened on December 16; and it got suspended on June 22, 2015 due to penal reasons. For those six months Kingfisher shares have been actively traded every Monday, the only day in the week when the stock is allowed to be transacted.
Prior to suspension, KFA was among the most traded shares on the exchanges. The reasons for the high trading volume in Kingfisher Airlines are:
a) It has a free-float of 95 per cent, which means nearly all issued shares are traded in the market; b) As of September 30, 2014, retail and high net worth investors held 58.5 per cent shares in the company and institutional investors (both domestic and foreign) held 9.92 per cent shares.
Trading in such shares can resume again if the company starts reporting quarterly earnings and pays a fine to the exchanges. The airline never reaped a profit since its launch in 2005, and as a result its accumulated losses wiped out its entire capital. The company had accumulated losses of Rs 16023.47 crore as of March 31, 2013 and its net worth at that date was a negative Rs. 12919.82 crore (per share negative net worth of Rs. 159.7).
Now as the consortium of 17 banks led by SBI is trying hard to recover around Rs 9100 crores from the wilful defaulter Vijay Mallya, and chances of Vijay Mallya coming back from Britain after his sweet-heart deal with Diageo are as good as negligible, from the perspective of the common shareholders the blocked investment in KFA is as good as dead.