AI-IA Privatisation

AI-IA Disinvestment- An imminent necessity

Air India was in the first list of companies referred to the Disinvestment Commission in 1996. The Commission, after a thorough examination, made the following recommendations:
Ø Government to provide Rs.1000 crores as equity for financial restructuring of Air India, which would raise its paid up capital to Rs.1154 crores;
Ø Simultaneously, Government to initiate process of induction of a strategic partner (having the requisite financial, technical, marketing and managerial capabilities and commitment for AI’s fleet expansion) on the basis of global competitive bids through issue of fresh equity shares of the total face value of Rs.770 crores, which would enhance the paid up equity capital to Rs.1924 crores and will reduce government holding to 60%;
Ø Strategic partner should be a consortium of Airlines and investors, with at least 25% of equity held by Indian investors, and the Shareholders Agreement to provide for appropriate share in the management to the strategic partner;
Ø Thereafter, Government to disinvest 20% of total paid up capital by offering 10% to domestic institutional investors at the price paid by the highest bidder and the remaining 10% to the retail investors and the employees at a discount (shares not taken by retail investors/employees to be offered to domestic investors), which would bring down the government holding to 40%.

The Government broadly accepted the recommendations of the Disinvestment Commission except the one pertaining to infusion of Rs.!000 crores and decided as under:
Ø Government equity to be brought down to 40% through disinvestment process;
Ø 40% of the equity to be disinvested in favour of a strategic partner;
Ø Up to 10% of the equity to be offered to employees;
Ø The balance 10% of equity to be sold to financial institutions and/or on the share market;
Ø Foreign holding to be limited to a maximum of 26% of total equity if the strategic partner is a joint venture with foreign holding;
Ø Global Advisor to assist in disinvestment process.

On the other hand Indian Airlines was not examined by the Disinvestment Commission and instead the case was considered by the Government in the light of Kelkar Committee (set up to examine the financial restructuring of Indian Airlines) Report. The main recommendations made in this report were:
Ø Infusion of Rs.922 crores by way of government equity/ upfront contribution/ subordinated loan/ ATF subsidy/ IA contribution/ ESOP;
Ø Infusion of Rs.758.35 crores by way of public issue.
The recommendations of Kelkar Committee were examined in the Government at various levels and finally the following decisions were taken:
Ø Government equity to be brought down to 49%;
Ø 26% equity to be sold to a strategic partner;
Ø Balance 25% equity to be sold to financial institutions, employees and other investors;
Ø Foreign holding not to exceed 40% equity of the bidders, except for NRIs/NRI-controlled Overseas Corporate Bodies, if the strategic partner is a joint venture with foreign holding.

The process of disinvestment was undertaken as per the prescribed procedure. In case of Air India, 9 offers were received from the prospective bidders but only 6 of these could meet the pre-qualification criteria of minimum net worth. 4 parties did not submit the Initial Technical Proposal and finally only one party (Tata-Singapore Airlines Consortium) was left in the fray. The entire process had almost been completed and 75 steps (out of a total of 80 (major & minor) steps) were already over when suddenly, the bidder intimated their intention to withdraw. The prime reason, though, was some sort of discord between the Consortium partners, but one factor which might have acted as a scaring factor was the media reports regarding minimum expected price of 25000-28000 crores (quoting quite a few political Hi-Fis about this unimaginable estimates). With 23 aircrafts of average life 15 years and per aircraft manpower of 700-800 (vis-à-vis 200-300 global standard), such an estimation was not justified. However, the skills & reputation of the cockpit crew and the technical personnel being one of the superb selling point, the entrepreneurship & financial strength of Tatas coupled with the aviation management skills of Singapore Airlines would have provided the much needed support to Air India and there was a fair chance of Air India-Singapore Airlines getting to the top of the ladder globally. Alas! this was not to be then but may be the time is quite ripe now to make a second attempt.

In case of Indian Airlines, 6 offers were received from the prospective bidders, out of which only 4 met the pre-qualification criteria of minimum net worth. 2 parties did not submit the Initial Technical Proposal and finally no party was left in the field.

After the merger of Air India and Indian Airlines, the combined entity becomes a very attractive one for any prospective partner. As it is, the aviation sector is fraught with numerous risks & adversities, having low margins in operation and cut throat competition, which necessitates mergers & acquisitions. There have been several mergers & acquisitions of major International/National Airlines overseas which need be taken note of, seriously, before it is too late. The loss of 2144 crore during 2007-08 and likelihood of incurring double the amount during the current year should sound quite frightening, both to the company as well as the Government. The most appropriate remedy lies in going in for immediate disinvestment of AI-IA entity and roping in of a good strategic partner to not only bailing it out of recurring financial trouble but more importantly, making it the top Airline globally (with due guarantee to sustain this position in perpetuity).