Air India Disinvestment

Why in news?

The Union Cabinet in June, gave its in-principle approval for disinvestment of government equity in Air India.

What is the rationale behind the disinvestment?

• Air India has been surviving on a Rs. 30,000-crore bailout package put together by the United Progressive Alliance government in 2012 to help its turnaround, and the debt relief provided by public sector banks.
• Yet the airline has neither adequately improved its service nor become viable.
• It continues to post heavy annual losses and has a massive outstanding debt of Rs 46,500 crore.
• The government money that keeps Air India from going bankrupt would be much better used to fund social and infrastructure programmes.

What could be the potential problems?

• The airline, at present, has a massive debt load, and it is estimated that even the asset sale may not fully cover its present liabilities.
• It is not yet clear whether the airline will be fully privatised or how its eventual sale will be executed.
• A ministerial panel under Mr. Arun Jaitley is expected to begin working on the details soon.
• Even though, the finance minister promised that the ministerial group would be set up quite fast, he refrained from stating a clear timeline for implementation.
• Also, the idea of selling Air India's assets one at a time, by unbundling them to secure better valuation, could lead to delays.

What could be done?

• The aim of the sale should be to get the best price for the airline.
• One good way to achieve this would be to allow both domestic and foreign buyers to bid freely for stakes.
• For this, the government will have to re-tune its FDI policy to allow foreign investors to buy a stake in Air India.
• And, to achieve a relatively quick exit, the best option would be to transfer all unrelated assets such as subsidiaries and real estate to a special purpose vehicle (SPV) at zero value.
• The name SPV is given to an entity which is formed for a single, well-defined and narrow purpose.
• All debt, other than that related to aircraft, should be transferred to this SPV.
• Thus, the airline, with a relatively clean balance sheet, would be available to be sold.
• Later, the SPV could sell the assets one thing at a time, without a deadline to realise better value and repay its portion of the debt from the proceeds.

Source: The Hindu & Business Standard