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Why the Air India Nariman Point property sale should be the template for future PSU disinvestment

After drawing a blank for its invitation of interest to buy 74 percent stake in the bleeding national carrier, Air India, the government has decided to sell its properties piecemeal. The first step in this direction is with the sale of its prime asset, the iconic Air India building at Nariman Point in Mumbai. This is the way forward when a bundled sale --  merger and takeover of controlling interest represent -- fails.

A bundled sale comes as a package including liabilities and encumbrances. A piecemeal sale is good both for the buyer and the seller and hence a win-win. The buyer gets to cherry-pick and the seller is able to make a transparent valuation of what is on offer which is not entwined in a bundle of assets and liabilities that a going concern is.

The Air India initiative is welcome and could well be the harbinger of things to come both for Air India and future disinvestment endeavours of the government. There is one thing which is patently wrong though---handpicking a fellow public sector unit (PSU), Jawaharlal Nehru Port Trust (JNPT) to buy the property. To be sure, being another PSU, the government would be protected from the charge of underhand dealings that inevitably takes place when the buyer is a private party but the flipside is JNPT may try to take advantage of this very factor---a fellow PSU—to hammer the price down. There should be an open, transparent competitive bidding. Intuitively, the price thus garnered would be a lot more than what JNPT would pay.

Air India’s whopping outstanding to banks and accumulated losses was a put-off for potential suitors for a going concern sale. A bundled product bristles with problems. It shelters, if not hides, the bad features of the going concern. And why on earth disinvestment should as a rule be strategic alone, i.e. to another airline company, for example. The noble intention behind such dogmatic insistence is of course protection of existing employees. It is a woolly socialistic notion that workers must be seamlessly transferred from the seller to the buyer.

Piecemeal sale of individual assets will bring in a lot more than a going concern sale where the latter is pockmarked with losses and liabilities. To wit, the prime property -- Air India building, would not have gotten the kind of valuation in a merger or stake sale exercise which now it would with its focused and exclusive sale. Let its aircraft too be disposed off in a similar manner.

It was unwise on the part of the former Civil Aviation Minister Praful Patel to buy 100 aircraft in bulk from Airbus when he could have easily emulated the more nimble-footed private counterpart IndiGo which negotiated a staggered delivery spanning several years at a predetermined price. Anyway, what has happened has happened. It can be undone only with divestment though inevitably entailing losses. Machinery, unlike landed property, starts depreciating from day one.

Air India. Representational image. Reuters.

Representational image. Reuters.

Such gradual attenuation would be a long-term process and would call for tremendous patience but there is no other alternative. Of course it would upset the priorities laid down for a liquidation drill and favor those in whose favor the given property has been mortgaged. To wit, the bank to which the Nariman Point property has been mortgaged would heave a sigh of relief.

In 2001, the NDA government led by its Disinvestment Minister Arun Shourie sold 51 percent stake in BALCO to Sterilite Industries Ltd, the sole bidder, for Rs 550 crore which gave rise to the charge from the Communists who for once spoke commercial sense---sale of its plant and machinery and immovable properties would have fetched more.

Stake sale is always problematic---either there is an allegation of under pricing or on the flipside overpayment when winner’s curse comes to haunt the buyer. Sale of undertaking or assets is better for the seller. There is a private sector example also---Tatas got rid of TOMCO by merging it with Hindustan Lever Ltd (as it was known then) on an exchange ratio of 1:15. They were peeved by just one share in HLL for every 15 in TOMCO and hence became wiser the next time when they sold Lakme Ltd to the same HLL. This time around, the transaction was not through merger or stake sale but by selling the undertakings of Lakme and its brand separately.

Yes, the sum of parts is sometimes more than the whole itself. Piecemeal sale of assets is a necessity to get over buyer resistance to bundled or lock-stock-barrel offer.


Updated Date: Jun 28, 2018 11:17 AM

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