Air India sale: How Modi government’s plan to retain 24% stake, other riders are keeping bidders away

The government’s decision to retain a 24% stake in Air India after the sale of 76% is deterring prospective buyers from bidding for the bankrupt airline, sources said. A 24% stake would give the government two nominees on the board which would mean continued interference in the running of the business, they said. While both domestic and international airlines were looking forward to the divestment of Air India, the conditions for the sale are onerous, they pointed out. The other condition that could have scared away prospective buyers is that the airline needs to be listed within a specified time frame. Moreover, buyers are not comfortable with the fact that the Air India operations need to be run at an arm’s length from their existing business, persons familiar with the development said.

“The government is using the same approach as it uses for any standard infrastructure project divestment. Air India is a different entity. The process should have been more consultative and open and commercial terms should have been set only after the stakeholders are taken into confidence,” said Amrit Pandurangi, an independent aviation consultant and formerly a director with global advisory firm Deloitte. Within a fortnight of the government announcing the sale of a 76% stake in Air India through an open bid process and sharing conditions for this in a preliminary information memorandum (PIM), on March 28, leading budget airline IndiGo declared that it does not have the capability to turn around the ailing airline and that it would not bid for it on the current terms. The country’s second-largest airline, Jet Airways, soon followed, saying it was opting out of the process.

A news report on Wednesday suggested that the Tatas, which partners Singapore Airlines in Vistara and Malaysia’s AirAsia, too may hold off, as certain conditions in the PIM were found onerous. Aviation industry insiders say what’s making airlines wary is the government retaining a 24% stake and laying down conditions on how the business is to be run by the buyer till such time as the government is a shareholder in the company. “The government must realise that 76% stake is more important than 24% and that the bigger stakeholder would have more skin in the game,” an industry expert said.

A PIM requirement that does not allow airlines to change consortium partners subsequent to the submission of the EOI is also seen as an unnecessary hurdle by airlines. “In case an airline wants to reduce its holding in the consortium or it does not find the terms of reference good enough to stay in the race for the acquiring Air India at the RFP stage, it is difficult for it to wriggle out. And there are many things that the government is holding close and not spelling out clearly at the EoI stage,” said an airline executive, not wanting to be identified. For existing airlines who were looking at Air India, a big deterrent is a clause in the PIM that states that, “till such time the GOI owns any shareholding in the company, the confirmed selected bidder shall carry on the business of the companies on a going-concern basis, as was being conducted prior to the date of completion of the proposed transaction; and on an arms-length basis from its other business.”

Aviation experts feel that this clause makes it difficult for the winning consortium to derive any synergy from the acquisition that could benefit their existing businesses – the primary reason for their bid. “And if that is not to be achieved, how can these airlines run simultaneous airline businesses?” questions an expert. “For any existing player deriving synergies from a broader perspective is what is important. At the end of the day it is private money that has to be put in this transaction and whatever we are buying has to have a value. For a transaction that is as big as Air India the entire airline may not have value to all the players. In that sense may be there will be a realignment in the government and certain conditions might be tweaked,” said an airline executive not wanting to be identified.

On the mandated listing, the airline executive said: “The government cannot dictate when to list and cannot define parameters like not listing or restructuring the company till the third year from the completion of the transaction and listing only after three years. How does one commit to this as no one knows if the market conditions will be conducive to a just valuation of the business at that point in time?” Aviation consultancy firm CAPA in its recent observations on the Air India disinvestment process stated, “As it happens in such complex transactions, being flexible and having an open mind on major issues is necessary. Revising EoI with more liberal terms will be required to further align it to investor interest.”

Aviation analysts feel that the government is approaching the entire Air India divestment process the wrong way, and that the process must be driven more by strong political intent and through a consultative process rather than approaching it like a bureaucratic exercise with the government dictating terms of reference and asking the airlines to fall in line. Sources in the government, however, say the airlines might posture right now but whether those who are saying they will not bid shall not show any interest will be known only by April 14, when interested parties need to send in their questions to the government. “As of now the aim of the government is to go by the PIM which is a public document that lays down the conditions of this transaction and realise maximum value from the transaction. And if changes are to be made the committee that is formed to look into Air India divestment will take a call,” said a person directly involved in the transaction.