Govt bites the bullet on Air India, but high debt, other bid conditions could make disinvestment a bumpy ride

The government on Wednesday put out an expression of interest (EoI) document detailing the strategic disinvestment of Air India. On offer is a 76 percent stake to a potential bidder with 24 percent being retained by the government, for the time being.

The Narendra Modi government needs to be commended for having bitten the divestment bullet despite insurmountable opposition from within, apprehensions of other stakeholders and stringent opposition from, well, the Opposition on any move to sell off the Maharaja. This is the second attempt by the government at divesting its stake in Air India and many thought there would be last-minute hesitation, and insufficient political will to actually start the process. By putting out the EoI, the naysayers have been silenced.

But having said that, the terms and conditions of the sale make one a bit sceptical of its success. Keeping over Rs 33,000 crore debt on the books of the two airlines which are on offer could be the biggest hitch. And there's more to spoil the party. Not only is there a strict net worth criterion for bidders which rules out almost all Indian airlines by themselves - they may have to mandatorily align with other well-endowed parties to bid - the government has also introduced a three-year lock-in.

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This means once a bidder consortium wins the bid for Air India, it cannot selloff its controlling stake in the airline to another buyer for three years. Then, there is a requirement for Air India to list after sometime, to enable the government to offload its remaining stake and exit completely.

Representational image. PTI.

Kapil Kaul, CEO & Director at CAPA South Asia said he sees ‘significant investor interest’ in the Air India sale process while flagging twin concerns: the debt pile and the fact that meeting the December 2018 deadline for completing the disinvestment may be ‘challenging’.

What is on offer is a 76 percent stake each in Air India and Air India Express and 50 percent in AISATS. AI Express is the low-cost international subsidiary of Air India and AISATS is a 50:50 JV so the government plans to retain 24 percent each in AI and AI Express but exit the ground holding joint venture completely.

By retaining just a 24 percent stake, the government has signaled that it will cede management control to the successful bidder. From all available indications, the government will also not be eligible for a seat on the divested airlines' Board. The government has also said that it intends to offload the remaining 24 percent stake at a later stage.

But by retaining a toehold in the airline business, the government has most likely already reduced bid value. It may not have a Board seat and may assure potential bidders of non-interference, but the reality on the ground may be quite different. Air India has long suffered from political interference and bureaucratic apathy. Disinvestment was the one chance for the government to hand over the entire airline business to a competent buyer to turn around the airline, in one go.

Here is a summary of the conditions bidders will have to abide by:

Net worth: A minimum net worth of Rs 5000 crore is mandatory for any bidder's interest to be considered. Besides, the bidder must also have been reported positive profit after tax (PAT) in at least three of the immediately preceding five financial years from the EoI deadline.

Three-year lock-in: The bidder will have to commit to a lock-in of its entire shareholding in AI and in the special purpose vehicle (in case investment in AI is made through a special purpose vehicle by a consortium or otherwise) for three years from acquisition. The bidder cannot cede management control of AI and of the special purpose vehicle for these three years.

Keep the brand: The bidder will have to continue using the 'Air India' brand for a minimum specified number of years, which will be explained at the request for proposal (RFP) stage.

Government exit: The EOI states that the government intends to divest its residual 24 percent shareholding through the ‘process of dispersed disinvestment’ (i.e. would not be sold as a block) on such terms as may be prescribed in the RFP. But the important point to note is that the bidder may be required to list Air India.

Debt: The government proposes to leave Rs 33,392 crore of liabilities with Air India and AI Express. ‘The existing debt and liabilities of AI and AIXL as on 31 March, 2017, are being reallocated and it is expected that debt and liabilities, including net current liabilities of Rs 88,160 million, aggregating to Rs 33,392 crore will remain with AI and AIXL (no change for AI-SATS except in normal course of business). This number shall be further adjusted to account for material business developments post 31 March, 2017 for instance purchases/delivery of aircrafts etc’. The remaining combined debt and liabilities of the two airlines are being transferred to an SPV called Air India Asset Holding Limited, which will be 100 percent owned by the government.

Already, the Centre has relaxed the cap on foreign investment in Air India to 49 percent, including all investments by foreign airlines and other entities. This opens up the possibility of any interested foreign airline partnering with an Indian carrier to table a bid for the ailing national carrier.