Wadia Group pledged 30% GoAir shares in FY18

Wadia Group, the parent company of Go Airlines (India) Pvt Ltd, which operates the budget carrier GoAir, pledged 30% of its "share capital" in the unlisted airline company for raising debts in FY18.

DNA Money could not ascertain the purpose for which the fund was raised through share-pledging and whether it has been infused into the holding company (Wadia Group) or the operating company (Go Airlines).

As per the financial numbers for FY18 filed with the Registrar of Companies (RoC), the polyester-to-airline conglomerate pledged 30% of its investments in the Jeh Wadia-promoted airline during fiscal 2018.

Go Airlines numbers for FY19 have not yet been filed with the RoC.

According to the data sourced from RoC, Go Airlines's working capital loans in FY18 included debts of Rs 392 crore, Rs 50 crore, Rs 86 crore and Rs 47 crore.

"Working capital loan of Rs 392.45 crore carries an interest rate of MCLR (Marginal Cost of Funds based Lending Rate) +1.60% p.a. and is secured as stated in Note 4A(i) further 30% of the company's share capital pledged by the Holding Company (Wadia Group), under the consortium banking arrangement," states the textual explanation for one of the working capital loans in the balance sheet of Go Airlines.

Textual explanation on other working capital debts also specifies pledging of Go Airlines's 30% share capital by the Wadia Group.

For Fy18, Go Airlines' total revenues from operations jumped to Rs 4,553.35 crore from Rs 3,524.88 crore in FY17. During the same period, its net profit rose 43.66% to Rs 294.88 crore from Rs 205.25 crore.

In its response to DNA Money queries, Go Airlines said, "Any growing business would need capital to fund its growth and hence GoAir, like any other growing company sought and got enhanced non-fund based limits".

The no-frills airlines, whose market share in terms of passengers flown in March was around 10%, did not respond to DNA Money's question on why and for what the fund was raised through pledging of shares.

"At the outset, we would like to state that GoAir has been performing significantly better than most of the other players in the industry on operational as well as financial parameters. Our business has been growing consistently and profitably since last six years. We inducted nine new aircraft in FY18 representing an increase of nearly 40% of the fleet during FY18 with the latest technology and fuel-efficient aircraft Airbus A320Neo," replied the GoAir spokesperson to DNA Money queries.

A chartered accountant with a leading management consultancy, who spoke anonymously, told DNA Money that the parent company of Go Airlines would have pledged its share capital to raise debts from banks.

He said this kind of borrowing is done for "several purposes"; "it (pledging of shares of an unlisted company by the parent company) can be done when there is dilution or listing expected. For these things, you start pledging your investment in the unlisted entity. It is also done when a company gets in a strategic partner or when the parent wants to invest into some other project".

The CA informed that pledging of shares is usually resorted to when a company's balance sheet is highly leveraged and is not enough by itself to raise debts on attractive terms.

He said to understand the implication of the share pledge, it was important to know whether the money raised has been pumped into the operating company (Go Airlines) or the investor company (Wadia Group).

According to him, Wadia Group's pledged shares would be shown as borrowings on the liability side of the balance sheet instead of investment in a subsidiary or investment in a promoted entity.

M S Mani, partner, Deloitte India, also told DNA Money normally a company takes recourse to pledging of shares when it is unable to raise funds on the strength of its own balance-sheet.

"Normally, a pledge of share happens when they (companies) are not able to raise enough funds using their own balance-sheet. If your own balance-sheet is strong you can borrow on the basis of your own balance-sheet, but in some cases what happens is either your balance-sheet is weak or maybe your credit rating is low, that is when you take recourse to a stronger balance sheet which a holding company may have," he said.

A senior executive of a leading airline, who did not want to be named, said an airline company or its promoter generally pledge shares when they run out of collaterals to raise debts.

"It is not a common practice. It happens when there is no other value left in the system. That is when shares are pledged. It's like an extra guarantee to get the money. It happens when you run out of other collaterals to raise debts," he said.

As per information submitted to the RoC, Go Airlines has two foreign currency term loans approved by the Reserve Bank of India (RBI) through External Commercial Borrowings (ECB) at an interest rate of six months' LIBOR + 3% basis points (bps) per annum (LIBOR 2.4524% as on March 31, 2018). It is repayable in 25 equal instalments upon delivery of last 25 aircraft out of first order of 72 Airbus-320 Neo aircraft.

Additional disclosures in the balance-sheet on "claims against the company not acknowledged as debts" during FY18 include bank guarantee outstanding of Rs 356 crore, up from Rs 230 in the year before, and Letter of Credit (LoC) outstanding of Rs 798 crore, higher from Rs 406 crore in FY17.

The airline executive, mentioned earlier, said generally in the aviation sector, LoC outstanding shoots up as transaction and imports climb up due to expansion in airline operations.

"LoC is one of the ways to ensure guarantee to the guy selling you something. That is a normal part of the business. It is used by airlines for maintenance, spare parts and other such things. As your imports keep going up, say from 10 aircraft to 20 aircraft, obviously LoC will go up," said the industry insider.

The Directorate General of Civil Aviation statistics show GoAir's market share increased to 9.9% in March from 9% in February and 8.7% in January. Its load factor was 91.4% and 92.6% in February and March, respectively.

IN FLIGHT MODE

• Rs 4,553.35 crore – GoAir's revenue from ops in fiscal 2018, up from Rs 3,524.88 crore in FY17
   
• Rs 294.88 crore – its net profit, up 43.665 from Rs 205.25 crore a year before