After two decades of economic reform , we have not yet evolved rules that facilitate the exit of poor managements before they ruin a company beyond redemption. Kingfisher Airlines has been ground to the dust by Mallya, a liquor baron who should never have entered this space.
A free-market economy is not just a device giving owners the freedom to sack employees. It is one where creditors and employees have the right to seize a company defaulting on dues, and sack the management. The managing shareholder or promoter is only one of many stakeholders. If he cannot meet his obligations to other stakeholders , they should oust him in a true free market economy. In India, alas, our unreformed regulations and procedures leave promoters in control no matter how big a mess they make.
In the US, creditors can quickly seize a company that defaults on dues, and reorganize or sell it to a new owner . The owner can get temporary protection from creditors through Chapter 11 proceedings. In this, a judge determines whether the company is so far gone that it must be liquidated, or whether it can be saved through mutual sacrifices by creditors, employees and owners. In the process, the judge can change the owner. So, often workers survive bankruptcy proceedings , but the owner does not.
That is what we should aim for in India too: an exit policy for incompetent, defaulting owners.
Kingfisher Airlines never made a profit, not even in the boom years when its rival airlines were profitable. Creditors should have moved in years ago when it became clear that the skills of a liquor baron were irrelevant for an airline. But in India creditors cannot quickly seize a company, least of all when the owner has political clout (as in Mallya's case).
06/01/13 Swaminatahn S Ankleswar Aiyar/Economic Times