Govt comes closer to fully exiting Air India, reaches out to investors

The government has thoroughly analysed the failed sale process of last year and is making changes in the privatisation process based on those lessons
The government has moved closer to a complete exit from Air India, with the committee of secretaries (CoS) led by Cabinet Secretary P K Sinha  agreeing in principle to sell 95 per cent in the national carrier. The proposal will now be put up for approval of the committee of ministers in the next 15 days, it is learnt. 

As the message from the top is that the Air India sale must be a success and for that the conditions should be eased, the government is taking several steps that range from reducing the debt burden for the potential buyer to rewriting the rules of the privatisation process. The objective is to make Air India an attractive buy, according to a source close to the development.       

The ministerial panel, headed by Home Minister Amit Shah, will make a final decision on the timing, price and amount of shares of Air India to be sold. By the first week of October, the expression of interest (EoI) will be out, an official said.

This will be the government’s third attempt to sell the debt-laden national airline after attempts in 2001 and then again in 2018 failed to generate an interest from buyers.

The government has agreed to exit the airline completely by selling 95 per cent in the carrier, retaining 5 per cent for ESOP of permanent employees.  

The government has thoroughly analysed the failed sale process of last year and is making changes in the privatisation process based on those lessons, the official quoted above pointed out.  

“EY— the transaction advisor for the process — highlighted that the government holding a 24 per cent stake had scared away many potential suitors. Hence, the decision to sell 95 per cent,” the official.

In a significant departure from the current norms, road shows will be organised involving small group of government officials where the prospective buyer can directly communicate to incorporate their suggestions in the structure of the Air India sale and the share purchase agreement, it is learnt. Typically, the selected transaction advisor engages with bidders and their identity is kept confidential from all including government officials in the sale process. In fact, the traditional practice is that a note guiding any strategic disinvestment states that potential bidders will be assigned code by the transaction advisor and all communication with government officials will be through the code. 

A Cabinet note to amend the guidance has been circulated.

“The process was designed to eliminate any chance of influence by government officials. However, from the previous experience, it was felt that in transactions like Air India where the bidders need to infuse a large capital, they are more comfortable dealing with the government. Also such decisions are rarely taken by the CEO or CFO of the bidding company, but by the promoter who wants to directly deal with the government,” the official briefed on the matter said.

Following feedback from potential suitors, the government is also relaxing a rule which makes it mandatory for the new owner to lock in shareholding for at least three years. The rule was framed to prevent asset stripping following the disinvestment of Centaur Hotel, Mumbai, in 2000, where the Comptroller and Auditor General (CAG) had pointed out that the successful bidder Tulip Hospitality Services was not interested in actually running the hotels but selling the asset for a premium.

“The feedback that we received from India Inc is that such a rule will restrict the new owner from raising capital to run the airline as banks will not lend for a loss making asset like Air India. In that condition, the owner will need to dilute his stake to raise fresh capital,” the official said.

Indian companies are significantly cash-starved as banks have turned cautious following a spike in bad loans.

The new owner would also allow merger or reverse merger of Air India with any existing business of the buyer- a change from last year’s norms where it was made mandatory for a bidder to operate Air India at arm’s length from its other business till the time there was government shareholding in the company. This would help a potential suitor like Tata Sons, which has two airline companies- Vistara and Air Asia India-- to merge Air India with the existing airline. An entity can also use reverse merger to offset Air India’s losses for future tax benefits. “Since government will not hold any stake this time, the bidders will be given full freedom for merger or reverse merger,” the official said.

The ailing carrier depends heavily on government allocations. And, the government believes that money can be used better in sectors like health and education. Budget documents show that from 2014-15 to 2018-19, the Narendra Modi government has put in almost Rs 24,306 crore in the carrier. The airline recorded a loss of Rs 7,635 crore in FY19, the highest in its history.

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