With an aim to create take off thrust for sale of ailing Air India, the Government on 27th January, 2020 (re)invited bids for a 100% stake in the company. The deal has now been sweetened after taking experience from the 2018 preliminary information memorandum (PIM) for inviting expression of interest for strategic disinvestment of Air India Limited which offered bidders a 76% stake in Air India including AI’s shareholding interest in the subsidiaries AIXL and AISATS. The debt-laden carrier has a 127-aircraft strong fleet that controls 50.64% of the International market share when clubbed with AIXL, among Indian carriers. Air India currently serves 42 international destinations. The government has set 17 March 2020 as the last date for submission of Expression of Interests.

The 2020 PIM has now provided for the following sweeteners:

1. Offer to bidders a 100% stake including AI’s shareholding interest in AIXL and AISATS. This offer will make Air India boardroom free of any government interference.

2. The revised offer has done away with most of the debt leaving the new owners with just Rs 23,286 crore debt. The debt left with the company is on account of 82 aircraft purchased by AI. AIXL, the subsidiary that will be sold along with AI, too has liabilities worth Rs 25,000 crore. Of these, the new buyers will take over only Rs 9,700 crore which will be adjusted to ensure that there are assets against them. The government will also take other liabilities, if any, arising on account of income tax, customs duty, and service tax. This is a very subtle but attractive move from the Government as compared to 2018 offer where it was offered that the existing debt and liabilities of AI and AIXL as on 31st March 2017 be reallocated and it is expected that debt and liabilities, including net current liabilities, remain with AI and AIXL and this was resulting in the new owners of the airline would have to carry on a huge debt on their backs for more than Rs 60,000 crore.

3. The company employs 17,984 people that have not been paid for quite a while now and for this now it is proposed that the government will clear the salary dues before the proposed transaction is completed. Further, the confirmed selected bidder shall ensure that 3% of the equity shares of the company acquired (or the special purpose vehicle in case investment in Air India is made through a special purpose vehicle) are offered to the permanent employees of AI as per terms of an ESOP. The detailed terms and conditions of ESOP would be provided at the RFP stage.

4. Under the 2018 offer, bidders were required to have a net worth of Rs 5,000 crore and positive Profit After Tax in at least three of the immediately preceding five financial years from the EOI Deadline. The new offer has relaxed the net worth requirement to Rs 3,500 crore, and PAT finds no mention.

5. Under the new offer minimum stake for an entity in a consortium has been reduced to 10%, while the minimum stake of the lead member in a consortium has also been reduced to 26% making it easier for entities to tie-up and submit an EOI.

6. In the 2018 document, the lock-in period was kept at three years, which has been relaxed now. The lock-in period has been brought down to one year post the completion of the proposed transaction, i.e. AI or AIXL, as the case may be, shall not transfer, dispose-off and /or create any encumbrance on, any assets owned by AI and AIXL, as the case may be.

7. Following the divestment, majority ownership and effective control of the national carrier must remain with an Indian entity, in accordance with the country’s rules governing foreign direct investment. Foreign entities including foreign airlines can own only up to 49% stake in domestic airlines.

8. Selected bidder shall ensure that the company continues using the “Air India” brand.

Though the above PIM has got pat on back from various corners but even the revised PIM is not all set to create that required thrust for reasons which are catacomb within the bid document. For instance, the market has now moved from owning aircraft to leasing them and owning these aircraft has largely been one of the reason that Air India has many old aircraft in its fleet which it has not being able to replace them for newer aircraft which are fuel-efficient and faster until recently when the company moved to the sale and leaseback model with their Boeing 787 purchases, and Air India’s newest A320neo aircraft, all 27 of them are on a lease.

In addition, currently, the government officials are only supposed to fly Air India, and the government is a major buyer from the airline. Once the sale happens, this condition will be waived and that is a chunk of business guaranteed to come to Air India going away. The slot utilisation is not the best for Air India, a company that really needs every bit of business it can get. Air India got the largest chunk of rights on Mumbai/Delhi to London Heathrow market when Jet Airways shut down, and they can fly another 21 flights per week between this sector which always has high demand, but they haven’t capitalised on this opportunity, giving it away to British Airways and Virgin to take the market. Further, as stated in PIM, the unused slots and the flying rights will stay with the airline for at least six months after the sale. It does not clarify whether the winning bidder will be allowed to trade in these rights.

The bidders thus need to watch out their deep pockets for the Maharaja’s business class !!

(The author of this write up is a Chartered Accountant and an Insolvency Professional. He can be reached at ipkamalgarg@gmail.com)

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