Jet example shows that Indian capitalism needs to be saved from capitalists

It's lamentable that after 14 years as a publicly traded firm, operating in a capital-intensive, competitive, regulated industry, Jet was still allowed to carry on basically as Goyal's fief.

The grounding of Jet Airways India Ltd., the country's oldest private-sector carrier, isn't just bad news for customers and its 23,000 employees. It raises yet again a question that's puzzled two successive governments and will continue to bedevil whichever party takes power after elections conclude next month: What's killing capitalism in India?

Jet was born in the early 1990s, when India's closed Soviet-style planned economy had just started embracing globalization and private enterprise. Back then, few Indians could afford to fly; now the country has the world’s fastest-growing aviation market. An airline that was at one point the industry’s dominant player should theoretically have been able to thrive.

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While Jet’s costs were too high compared with those of its no-frills rivals, that issue could have been fixed. The real problem is that Jet founder Naresh Goyal gambled away a perfectly fine — albeit, unprofitable — airline by not injecting equity himself into the cash-strapped business, or stepping aside in time and allowing someone else to do so.

It’s only natural for entrepreneurs to be possessive and irrational, especially when — like Goyal — they’ve been so wildly successful for so long. The bigger conundrum is why providers of outside capital (banks and capital markets) didn’t act as a disciplining force on Goyal and save the business.

Despite Abu Dhabi’s Etihad Airways PJSC taking a 24 percent stake in the airline in 2013, Jet has been slipping deeper into negative equity for seven years. Had India’s state-run banks insisted on a timely and substantial capital infusion, and had they credibly threatened to dilute Goyal’s 51 percent controlling stake by issuing themselves new shares when the inevitable debt default occurred, Jet would now be flying under a new owner.

When Jet's rival Kingfisher Airlines Ltd. collapsed in 2012, India didn't have a modern bankruptcy law. Now it does. Even so, in Jet’s case — or in the high-profile $7 billion insolvency of tycoon Anil Ambani’s Reliance Communications Ltd. — creditors didn’t utilize that option. Instead they foolishly relied on entrenched insiders to make things right, thereby hurting their prospect of extracting value.

Banks are now awaiting a white knight. Yet for a new owner to revive the airline after it has stopped flying will necessarily mean very deep haircuts on its $1 billion of net debt. State-run lenders will lose heavily, as will employees. It’s an unnecessary waste of capital and jobs in a country that doesn’t have enough of either.

So what’s to be done? Private investment in India has been weak for years now, first under a Congress Party-led coalition and then under Prime Minister Narendra Modi’s Bharatiya Janata Party