Bidder says why disinvesting Air India for free makes sense

At least one of the prospective bidders for Air India wants the airline to be disinvested without any money changing hands, or in other words, for free. In one of the queries raised by the bidders after the latest change in bid conditions by the government, a question pertains to the government wanting at least 15% of the enterprise value (EV) of Air India in cash. This prospective anonymous bidder has suggested the entire EV should be left in the airline, in the form of assumed debt.

The bidder has cited multiple reasons why the government should not demand even 15% of the EV in cash. It claims the buyer will have to shell out cash from its own pocket to upgrade the acquired airline’s fleet and in getting the grounded aircraft back in the skies; more cash to service obligations to aircraft lessors; and then some more to meet health, gratuity and other employee benefits besides offering them a VRS package.

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“The focus should be on the cash required by the ailing company in difficult times and not on taking any money out of the business. We therefore believe the 85% / 15% condition is misguided and contrary to the aim of the government of India, which is to divest AI successfully on a basis that makes the airline thrive. The entire EV should be left in the company in the form of assumed debt,” it said.

In the latest change in bid conditions, the government had said that the EV will now be discovered through bidding and at least 15% of it will have to be paid by the winning bidder in cash. To the suggestion on waiving the 15% cash stipulation, the government has responded with its stock answer, “No change in PIM provisions”.

But this is not a suggestion which ought to be brushed aside. Getting rid of the perennial loss-making Air India, even if the government does not make a rupee from the sale, is an idea worth thinking about.

Here’s why:

1. The debt on the books of Air India as on March 31, 2019 was nearly ₹60,000 crore, of which only a third was backed by assets. And AI’s Chairman and MD, Rajiv Bansal, said a few days back that in 2019-20, the airline made a loss of nearly ₹8,000 crore; so this would get added to the accumulated losses, which were over ₹62,000 crore till March 2019. AI is yet to declare results for FY20.

2. The sale of the airline had bombed in the first attempt the Modi government made in 2018, when only 76% of the equity was on offer and the entire debt was to be borne by the buyer. In the second selloff attempt which is ongoing, the government has already done multiple rethinks, including paring the debt to less than half, but bidders have remained scarce.

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The Tata group was seen as a potential bidder before the pandemic struck and since then, there have been multiple reports of its waning interest in Air India. Once again, there are murmurs of the Tatas teaming up with Singapore Airlines to participate in the bidding but there has been no confirmation from the group about its continued interest in Air India.

Meanwhile, the government has issued not one or two, but nine corrigenda to the original proposal, changing the conditions which specified how much debt will have to be borne by the bidder and now finally offering to negotiate a transaction based on the enterprise value.

Put simply, EV will be the combined debt and equity figure, arrived at through a bidding process, eliminating the need for any buyer to shoulder a pre-decided debt. And at least 15% of the EV is to be paid by the bidder in cash.

3. The COVID-19 pandemic has already made the airline business unsustainable with unforeseen losses for all airlines in the country. Air India, which has tried to buck this trend by operating Vande Bharat repatriation flights and launching new international destinations under the current bubble arrangement, has also been hit hard. The airline may post record losses yet again and its debt pile may bulge further if disinvestment is again delayed

Disinvestment Secretary Tuhin Pandey had earlier acknowledged that delays in disinvestment have led to asset depreciation; assets have anyway been impacted due to the pandemic. In fact, the decision to drop all earlier norms and go with the EV value was taken so that the prospective bidders can assess how much are AI’s assets worth now and how much cash flow can be generated.

Given this scenario, the government would do well to drop the 15% cash condition and get rid of AI without making a rupee from the sale. This will at least obviate the need for further investments by the exchequer. The government has given in excess of ₹30,000 crore to AI in the last decade alone. What is the guarantee that AI will not need more equity support to survive? ‘Shut it or sell it for free’ seems to be the only option now.

The last thing the government would want is another dud sale and it would remain in the interest of all stakeholders to make a success of the disinvestment process this time around — even if the Maharaja goes for a song.