A soaring decision

But govt should not delay Air India's disinvestment

The Union Cabinet’s approval in principle for disinvesting the government’s stake in Air India is a momentous and welcome move. For far too long, Air India has struggled to be financially viable and yet several previous attempts to offload the government’s stake in the airline have come a cropper. So have attempts to bring about a turnaround in the operations of the airline by heavily subsidising it. The last such attempt was made in 2012 when the United Progressive Alliance government opted for an equity infusion of over Rs 30,000 crore. Yet the airline has neither adequately improved its service nor become viable. It continues to post heavy annual losses and has a massive outstanding debt of Rs 46,500 crore. Clearly, then, the government has taken the right call. But for this bold decision, which many previous governments have baulked at, to yield the best results, the Narendra Modi government must ensure a speedy execution of the Cabinet’s decision.

In this regard, the options outlined by Finance Minister Arun Jaitley for proceeding henceforth have raised some worries that the actual implementation may not be prompt. The government will now set up a group of ministers, under Mr Jaitley, to look into a host of issues such as tackling Air India’s debt, eligibility criteria for bidding and the treatment of the airline’s subsidiaries. But even though the finance minister promised that the ministerial group would be set up “quite fast”, he refrained from stating a clear timeline for implementation. That, in essence, is the biggest worry: The loss to Air India’s valuation due to prolonged uncertainty. This is especially true because the idea of selling Air India's assets piecemeal, by unbundling them to secure better valuation, could lead to delays. This should be avoided. It is true that some of Air India’s assets such as the real estate holdings are not being used optimally at present and it can be argued that they would command greater value if they were sold off separately. But it is also true that each year’s delay in trying to maximise at the micro level will add to the overall cost by a few thousand crores of rupees, and eventually lead to a further loss of market share. 

Instead, the government should, in the same bold, reform-oriented spirit in which it has taken this decision, also reject the piecemeal sales approach. To achieve a relatively quick exit, the best option would be to transfer all unrelated assets such as subsidiaries and real estate to a special purpose vehicle (SPV) at zero value. All debt other than that related to aircraft — approximately Rs 27,000 crore — should be transferred to this SPV. The airline, with a relatively clean balance sheet, would then be available to be sold as is and quickly enough. Possibly, it could yield some equity value as well. Later, the SPV could sell the assets piecemeal without a deadline to realise better value and repay its portion of the debt from the proceeds. The government could pay off the balance debt from two sources, the proceeds from Air India’s sale as well as the Budget. Since the budgetary payout would be a year or more after the airline sale, it would be delinked from the sale. Thus, the government would be able to avoid the political unease often related to such decisions. All in all, the government's loss would be its equity of Rs 14,000 crore and the debt paid out of the Budget. But these would be booked in stages, long after the airline has been sold.