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Clear skies ahead for Maharaja's take-off; govt okays sale of debt-ridden Air India

Govt Walks The Talk, Okays Sale of Debt-Ridden Air India

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In a momentous decision, one that had eluded policymakers for years, the Union government on Wednesday cleared the sale of Air India, the national carrier that has run up debt of more than Rs 50,000 crore in the past decade, and carries Rs 23,000 crore of accumulated losses.

"A Group (of Ministers) will be set up to finalise the modalities and details of disinvestment," Finance Minister Arun Jaitley said at a Cabinet briefing in New Delhi.

In its decision, the Cabinet Committee on Economic Affairs approved the proposal from the Civil Aviation Ministry, backed by NITI Aayog, to sell the 70-year-old airline that had become an symbol of public-sector inefficiencies in a cut-throat and rapidly-modernising market.

Compounding the airline's problems, the the Comptroller and Auditor General had in March this year found that it had manipulated its operating losses by as much as Rs 6,300 crore ($1 billion) over the past three years.

The GoM will decide the treatment of unsustainable debt, hiving off of certain assets to a shell company, de-merger and divestment of its five subsidiaries, three of which are profitable.

Finance Ministry officials told DNA that the government could also opt for a 'golden share policy', wherein the it will continue to hold majority voting rights despite being a minority shareholder.

Around 4-5 bidders are expected to be in the running for the national carrier, but the Finance Ministry will first need to decide on a debt write-off before it can consider potential buyers.

The government is considering a few options for debt retirement, including the sale of its fleet and real estate assets, which is expected to raise about Rs 15,000 crore and up to Rs 12,000 crore, respectively. Other options include holding a 26 per cent share to be offloaded strategically later.

Air India was started by Jamshed Ji Tata in 1932, which nationalised in 1948. Air India was the first Asian airline to lease a jet aeroplane.


The Debt-Trap

In 2007, Air India, which operated all international flights under the national flag, and its domestic counterpart Indian Airlines were merged into a single entity, National Aviation Company of India Limited (NACIL).

Both existing airlines were dissolved without being wound up. As a result, all assets, liabilities and obligations of both these companies were taken over by NACIL, effective August 27, 2007. On November 24, 2010, NACIL was renamed Air India Limited.

Since then, however, the cash accruals of the new company has been negative, primarily because of operational losses and interest expenses on loans taken to purchase new aircraft.

To staunch the bleeding, a Turn Around Plan (TAP) and financial restructuring plan (FRP)was formulated in April 2012, in consultation with Deloitte Touch Tohmatsu India Pvt Limited and SBI Capital Markets.

As per the FRP, the government was to infuse Rs 42,182 Cr as additional equity over 22 years in a phased manner.

However, that capital infusion has been delayed. Against the planned equity of Rs 22,609 crore for the past five years (FY 2012-2016), total equity infused until now today is Rs 22,280 crore. Banks currently have an exposure of about Rs 53,980 crore.

...& Analysis

The move establishes this govt's commitment to fiscal discipline and open markets.
Selling debt-heavy, loss-making entity in a competitive, price-sensitive market will not be easy.
There could be opposition from employee unions, but the government needs to stand firm.

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