Can Air India’s privatisation process take off?
L to R: Tejasvini Shirodkar, Pearl Boga and Karen Issac

In the recent past, a lot has been debated over the ongoing privatisation process of national carrier Air India. The government and the airline management have been working on different ways to draw out a strategy towards the privatisation process.

The government has given its in-principle approval to divest a 76% stake in Air India to private players, including Air India’s 100% stake in low-cost carrier Air India Express Ltd (AIXL) and 50% stake in Air India SATS Airport Services (AISATS).

On 28 March, the civil aviation ministry released a preliminary Information Memorandum (IM) containing information about the disinvestment of Air India, AIXL and AISATS and sought Expressions of Interest (EoI) from interested bidders by 14 May.

This is an opportunity for foreign airlines to invest in Air India. It opens up avenues for individual bidders as well as a consortium of individuals or airlines to invest in Air India. The acquisition of Air India would provide the investor with best international slots and immediate access to the domestic network.

With 76% disinvestment, the control and management of Air India will solely vest with the private player, thereby allowing them to operate without much hurdle. However, since the government will retain a 24% stake, the winning bidder will not be able to exercise 100% control or merge the airline with any of their existing businesses. Some other issues need to be considered, too.

FDI policy

According to the Foreign Direct Investment Policy, 2017, the FDI limit for scheduled air transport service or domestic scheduled passenger airline and regional air transport service has been raised from 49% to 100%. FDI up to 49% is permitted under the automatic route and FDI beyond 49% through government approval.

Foreign airlines are allowed to invest in Indian companies, i.e. operating scheduled and non-scheduled air transport services, to the limit of 49% of their paid-up capital, subject to government approval.

Even though FDI was permitted in Indian aviation companies, the policy expressly restricted foreign airlines to invest in Air India. However, Press Note 1 of 2018 permitted foreign airlines to invest in Air India, subject to certain conditions such as: (a) foreign investment in Air India, including that of foreign airlines to not exceed 49%, either directly or indirectly (b) substantial ownership and effective control of Air India to continue to be vested in Indian nationals.

It is clear from the above that the FDI policy restricts the ownership and control of Air India to Indian nationals. However, with the onset of the disinvestment process and issuance of the IM, the condition of ownership and control in favour of Indian nationals is debatable. Therefore, pursuant to the completion of the bidding process and award of the bid, the FDI policy will be required to be suitably amended.

Debt concerns

Air India is jostling with a debt of about Rs 52,000 crore and salary arrears of approximately Rs 1,200 crores accrued from 2012. The winning bidder will have to absorb this liability.

However, interested bidders have been expressing interest in acquiring only the cash-rich divisions of the national carrier and not absorbing the entire debt. The IM mentions that the interested bidder will be responsible for the existing debts of Air India post disinvestment.

AISATS is the only continuous profit-making entity for the past five years. It provides services in Bengaluru, Delhi, Hyderabad, Mangalore and Trivandrum in India.

After the release of the IM, many airlines which were earlier expressing their interest in acquiring Air India have backed out since it appears that the terms of the IM are not favorable to such airlines. Only a handful of international airlines have expressed their interest to acquire the debt-ridden airline, although no formal EoI has been submitted. So, the government should consider divesting, in a phased manner, the balance 24%.

Staff issues

The employees of Air India (including pilots) have been demanding clearance of salary dues. Air India has 11 unions opposing its privatisation due to fear of retrenchment. The government needs to negotiate the terms of employment for such employees prior to the bidding process to ensure the privatisation process does not get stalled.

Further, upon transfer of control and management pursuant to the disinvestment, the investor will be required to absorb the salary arrears and provide benefits to such employees on terms which are no less favourable than the current employment terms.

Conclusion

The government would need to make even greater efforts towards the debt situation as it will affect the disinvestment process. Further, the government should retain a 24% stake only in order to take care of core issues like debt, employees and overheads and should gradually sell this remaining stake.

We suggest that in order to attract interested investors, the government should amend the IM by absorbing maximum debt and lessening the liability on the investor. It should also remove the three-year lock-in period condition for consortium of bidders and allow the winning investor to merge their existing business with that of Air India.

However, the increasing political interference in the privatisation process is delaying the sale of Air India and the airline could gradually become unsustainable for any player. The government must make an informed choice to save the carrier.

Tejasvini Shirodkar is a partner, Pearl Boga is a senior associate and Karen Issac is an associate at law firm Rajani Associates.

Like this column? Sign up for our daily newsletter to get our top reports.

Leave Your Comment(s)