Air India Disinvestment: 76 Per Cent Stake On Offer, And Strict Conditions For Bidders

In the biggest strategic disinvestment in Independent India, the government is offering 76 per cent stake each in Air India and Air India Express to bidders. This makes it clear that management control will be transferred to the successful bidder in each case, but the government will still retain a toehold in the airline business. It is also clear that the 24 per cent stake the government will retain in the parent airline and its subsidiary airline, will be offloaded at a better valuation, at a later stage.

There are some stringent conditions that bidders will have to follow to become eligible for acquiring the Maharaja. Not only is there a strict net-worth criterion which rules out almost all Indian airlines by themselves (they may have to align with other well-endowed parties to bid), the government has also introduced a three-year lock-in. This means once a bidder consortium wins the bid for Air India, it cannot sell its controlling stake in the airline to another buyer for three years.

There is a requirement for Air India to list after some time for the government to offload its remaining stake and exit completely. And the government plans to retain over Rs 33,000 crore debt on the books of Air India and Air India Express.

The expression of interest, inviting bidders, has been released today (28 March). Along with Air India and Air India Express, the government will also offer all of its 50 per cent stake in the ground-handling joint venture, AISATS.

The other subsidiaries of Air India are not part of this transaction and are being spun off into a special purpose vehicle (SPV). These include Alliance Air, the regional airline; AIATSL, which is a 100 per cent owned ground-handling subsidiary; AIESL, which is the engineering arm; and HCI, which owns hotels like Centaur. So essentially, the current expression of interest invites interest for only the airline, its low-cost international arm, and the ground-handling joint venture company.

According to the timeline provided, the last date for submission of expressions of interest by bidders is 14 May, and intimation to qualified bidders will be sent by 28 May. If these timelines are adhered to, it is possible that the disinvestment process may get completed in this calendar year, before the general election is due and during the tenure of the present National Democratic Alliance (NDA) government at the Centre.

Here are some other important conditions which bidders must keep in mind before preparing to place their interest on record:

1) Net worth: A minimum net worth of Rs 5,000 crore is mandatory for any bidder's interest to be considered. Besides, the bidder must also have reported positive profit after tax in at least three of the immediately preceding five financial years from the expression of interest deadline.

2) Three-year lock-in: The bidder will have to commit to a lock-in of its entire shareholding in the airline and in the SPV (in case the investment in Air India is made through an SPV by a consortium or otherwise) for three years from acquisition. The bidder cannot cede management control of Air India and of the SPV for these three years.

3) Keep Air India brand: The bidder will have to continue using the 'Air India' brand for a minimum specified number of years, which will be explained at the request for proposal stage.

4) Government exit: The expression of interest states that the government intends to divest its residual 24 per cent shareholding through the “process of dispersed disinvestment (i.e., would not be sold as a block) on such terms as may be prescribed in the request for proposal. But the important point to note is that the bidder may be required to list Air India.

5) Debt: The government proposes to leave Rs 33,392 crore of liabilities with Air India and Air India Express. “The existing debt and liabilities of AI and AIXL as on 31st March, 2017 are being reallocated and it is expected that debt and liabilities, including net current liabilities of INR 88,160 Mn, aggregating to INR 3,33,920 Mn will remain with AI and AIXL (no change for AI-SATS except in normal course of business). This number shall be further adjusted to account for material business developments post 31st March, 2017 for instance purchases/delivery of aircrafts etc.” The remaining combined debt and liabilities of the two airlines are being transferred to an SPV called Air India Asset Holding Limited, which will be 100 per cent owned by the government.

6) The government has already relaxed the cap on foreign investment in Air India to 49 per cent, including all investments by foreign airlines and other entities. This opens up the possibility of any interested foreign airline partnering an Indian carrier to place a bid for Air India.

Remember, IndiGo, India’s largest airline by passengers, is the only Indian airline to have formally expressed an interest in Air India. The other interested parties have been variously eyeing the Air India Express pie and the ground-handling businesses.

So, while the sale process has got a kick-start, what remains to be seen is whether the government has a reserve price in mind for the sale and what it ultimately hopes to generate in revenue from the sale. Also, since the process has been delayed already, will the timelines be adhered to?

Another important point to ponder is whether the bid value of the airline will suffer because a) government continues to hold a stake, though a minority one, and b) any insistence on the bidder keeping employees on rolls for one year.