The tragedy being played out at banks trying to recover their huge loans from the now defunct Kingfisher Airlines was foretold by analysts as early as 2011.

The airline was then able to get the lenders to agree on a debt recast package, under which a part of the debt was converted into equity shares at a premium of nearly 62 per cent.

Veritas Investment Research in its report on the airline had said: “The convoluted logic of debt restructuring, via acquisition of CCPS (compulsorily convertible preference shares) of an organisation that doesn’t have the cash to meet its obligations, which were subsequently converted into ordinary shares of Kingfisher at a premium of 61.6 per cent speaks eloquently to the financial shenanigans underway at the banks and Kingfisher Airlines.”

Lenders had even gone to the extent of converting ₹650 crore ($96 million) debt into preference shares on the assurance from the airline that it will list on the Luxembourg Stock Exchange by selling global depository receipts.

But the airline never got down to listing it in the exchange, citing poor economic conditions. However, the airline received a lifeline in the form of a debt recast package after a one-time relaxation in restructuring norms sanctioned by the Reserve Bank of India.

As per the package, debt of up to ₹1,355 crore from lenders were to be converted into share capital. Also, it allowed conversion of debt of up to ₹648 crore from promoters into share capital and rescheduling of repayment of the balance debt to lenders over nine years with a moratorium of two years.

The shares were acquired at a premium of 61.6 per cent at ₹64.68 (prevailing price was at ₹39.40) the closing price of the underlying common share. This resulted in the lenders owning 23.2 per cent stake in Kingfisher Airlines. This led to a peculiar situation for the lenders as they ended becoming both the owners and creditors of the airline, thereby compromising shareholders’ interest.

Interestingly, doubts were raised over the role of IDBI Bank which is on the CBI’s radar currently, in 2011 itself. IDBI Bank, which was issued compulsorily convertible preference shares as part of the debt recast package, was clear that its exposure was much higher than the rest. A single default could have wiped out 4.7 per cent of its book equity.

“I think the government as well as the lenders acted a bit too late. New promoters should have been brought in just as they did with Satyam Computers and SpiceJet,” Prem Rajani, managing partner of law firm Rajani Associates told BusinessLine .

Veritas Investment Research in its 2011 report on Kingfisher Airlines also mentioned that the lenders should let go of the airline. “Kingfisher’s disclosure is poor, accounting policies capricious, balance sheet is in duress, free cash flows are absent, collateral provided to financial institutions by its holding company insufficient and the actual liabilities on Kingfisher’s books are understated,” the Canadian research firm had observed.

Five years later, all this is playing out as government agencies close in on the airline and its promoters.