Air India: How the government got rid of the albatross around its neck

Air India's sale process will be used as a case study for future asset sale and privatisation bids

Three prime ministers, two aborted missions, multiple rule changes and two decades later, India has finally been able to execute the country’s most complex asset sale — privatise its national carrier, Air India. 

“What is different about the process this time is that bureaucrats got complete independence to run the show. The finances of the government were stretched so thin, especially after Covid-19, that there was a message from the political masters to treat it as a distress sale. Close the deal before the company stops being a going concern, we were told,” said an official involved with the process.

India’s disinvestment process has faced the shadow of corruption with India’s first disinvestment minister Arun Shourie facing corruption charges.

A special panel of ministers was formed for Air India’s privatisation. Normally, it is the nodal ministry or company which prepares its assets and identifies companies. But here it was a group of ministers with powers equivalent to the Cabinet which was deciding how to design the process.

“That tells you a lot about the intent of the government to sell the company,” the official said, adding that one of the ministers in the panel often described the company as an albatross around the government’s neck.

The Modi government’s intent to privatise the airline was first reflected in the Economic Survey of 2017, when Chief Economic Advisor Arvind Subramanian noted that the disinvestment of Air India would help boost Indian airlines’ international market share. “Reforms such as privatisation of Air India are some suggestions to improve Indian airlines’ share in the international market,” he wrote.

However, though The Economic Survey is an official record of the government, it often does not reflect political will. After all, the privatisation of Air India has been an emotive issue, with  allegations of corruption smearing the process in the past.

The clearest indication that the government was ready to bite the bullet came on a Sunday evening in 2017 when then finance minister Arun Jaitley in an interview to Doordarshan said that his government was trying the “art of the impossible”, and that the phenomenal growth of the civil aviation sector had given the government a “historic second chance” to lure a strong investor to run Air India.

The first chance that he was referring to had come in 2001, when a freshly minted disinvestment ministry led by Arun Shourie and Jaitley had put a 40 per cent stake of the airline on the block.

A number of foreign airlines, including Lufthansa, Swissair, Air France-Delta, British Airways, Emirates and Singapore Airlines (SIA), along with the Hinduja and the Tata groups, had expressed interest in buying the airline.

But when the government mandated that there had to be a local partner, most airlines pulled out. The Hindujas, who were embroiled in the Bofors issue, were disqualified, Tata’s partner, SIA, citing ‘adverse climate and opposition to privatisation’. 

The adverse climate that SIA was referring to was the bombing of the Colombo Airport attack by LTTE in which SIA suffered loss due to damaged aircraft and accusation by parliamentarians that the shareholders agreement had been changed to suit Tata-SIA. SIA said it was surprised by the intensity of opposition to the privatisation process from politicians, trade unions and the media.


Pradip Baijal, then secretary of the disinvestment ministry, says the accusation of corruption was only for political reasons but caused a major delay. “CEO of SIA wrote to me saying that the reason they were backing out was the Colombo Airport attack and the delay in disinvestment which very often leads to withdrawal of foreign airlines. I felt sorry that a very good airline like SIA had withdrawn,” he said.

While Jaitley’s public comments showed that the government had made up its mind to let go of the airline, when the bid documents were published in 2018, the government decided to hold on to a 24 per cent stake in the airline, putting only 76 per cent on the block, along with debt.

A former top official of the finance ministry said that it was again the political opposition which pushed them to be conservative. “There was a clear instruction that no one should be able to say that the government was selling its family silver in distress. Hence a rationale was developed that now we can discover the price by selling 76 per cent and when the company has been turned around and is in a strong position, the government will be able to gain a big upside by selling the remaining 24 per cent. Also, a board seat would allow the government to handle the labour issues more effectively,” the official said.

But prospective investors saw this as a big negative. “We could have probably looked at it, But I have always dismissed the idea of Air India while government ownership is involved. I do not think it would be enough to encourage us to look at it,” William Walsh, then CEO of IAG Group, the owner of British Airways, said.

The process ended in an embarrassment for the government as it failed to get a single bid.

By then the Department of Investment and Public Asset Management (DIPAM), had undergone a change of guard. Atanu Chakraborty, a Gujarat cadre officer who earlier worked as Director General of Hydrocarbons, was appointed as secretary. “Chakraborty’s role has been crucial. I think his experience of overseeing multi-billion-dollar exploration projects in the petroleum sector gave him the pedigree of formulating rules which was the key behind his success,” said a banker involved in the process.

Under Chakraborty’s stewardship, the government approved a key change in the privatisation process and allowed officials to take part in roadshows. “The roadshow is the most crucial aspect of any M&A process where one gets a lot of insights about the company being sold and the demand from investors. The existing disinvestment process in order to maintain sanctity mandated that roadshows are to be conducted only by the merchant banker.

“This was a big hurdle as any willing buyer will want to have a heart-to-heart talk with the seller (in this case, the government). The seller also gets a perspective of the actual appetite of the buyer. Sometimes we are more optimistic or pessimistic than the bidder about the asset we are selling. The roadshows gave us a perspective that the employee size was a minor issue for the Tatas. They were more concerned about the huge debt,” a government official who participated in Air India’s roadshows said.

Chakraborty could not conclude the process, however, and it was under his successor Tuhin Kanta Pandey, a 1987-batch IAS officer, that the second bid document was released. By then the government had learnt its lesson and put 100 per cent of Air India on the block. It also decided to absorb 30 per cent more in debt and liabilities than in the previous attempts.

Moreover, the condition that the new owner will not be able to merge Air India into an existing business for three years was waived off. The condition was a thorny issue for the Tatas Group, which already operates two airlines- Vistara and AirAsia India.

But then the pandemic upended the aviation industry and the Tatas, who had developed a business plan to acquire the company, started getting cold feet. The impact of the pandemic was severe on both Tata and its partner SIA. In the absence of both domestic and international markets, SIA was forced to ground most of its fleet. Tata's two aviation ventures had lost more than Rs 3,500 crore in FY21.

During a virtual roadshow, the Tatas expressed their reluctance to absorb the debt which was around Rs 24,000 crore. Pandey, whom his colleagues describe as a “very practical person”, realised that he needed to further sweeten the offer.

“Pandey is upfront with the government, be it with annual disinvestment targets or taking the demands of the investors to his political bosses,” the official said.

In July, when the country was normalising from the lockdown, Pandey and merchant banker EY organised a presentation for home minister Amit Shah and his five colleagues. The presentation, which lasted two hours, gave a projection that if the government wanted to stop the process and resume it after the pandemic, it would cost the exchequer Rs 15,435 crore, or around Rs 620 crore per month.

Instead, they suggested that the government should eliminate any pre-fixed debt level and allow bidders to quote an enterprise value based on combined debt plus equity value — a model never tried in the history of the government’s privatisation exercise. They argued that this would allow for market discovery of value based on real assumptions, Also, the process would not be anchored to a debt level, which had so far been an indicative reserve price for the bidders.  

 

“Under normal circumstances, the government would not have agreed to such a rule change, but with resources stretched thin due to Covid-19, it had few options,” said a lawyer involved with the process.

The next step was to ensure that all labour and HR issues were sorted out before the handover.  A series of negotiations, such as the government agreeing to clear medical, retirement benefits and pending arrears, ensured that the Tatas would not have to face warring employee unions after the takeover.  

Former civil aviation minister Hardeep Puri was deputed to spread the message that the government would be forced to shut Air India if the sale process failed.

Officials say that the learning from Air India’s disinvestment has been so immense that it will be used as a case study for future asset sale and privatisation processes. 

“It will be a happy homecoming and not a saas-bahu drama. There will be no dharna, morcha and hartal, privatisation is no more a dirty word,” a minister who is part of the panel said.