Setting the ball rolling for the divestment of flag carrier Air India, the government on Wednesday issued a preliminary information memorandum (PIM) offering 76% equity in the airline along with its budget arm Air India Express and airport service unit Air India SATS. The proposed dilution will ensure transfer of complete management control of the carrier, while allowing foreign airlines or foreign consortium partners to pick up 49% equity in the airline provided that the chairman and at least two-thirds of directors are Indians and effective control vests with Indian nationals. A minimum of 27% equity must remain with Indian entities. The government has sought an expression of interest (EoI) for a 76% stake in Air India along with control of its 100% owned subsidiary and low-cost arm Air India Express, and a 50% equity that Air India holds in AI-SATS (a joint venture with Singapore Airport Terminal Services). There will be a separate divestment for Air India Engineering Services, Air India Hotel Corporation and its regional low-cost arm Alliance Air. The final bids are to be invited on May 14 and the divestment process is to be completed by December this year.

Advisory firm EY has been appointed as the sole transaction advisor and has made the EoI the first stage for the potential bidders to qualify, following which the selected bidders will become eligible for the second stage or the request for proposal (RFP) round. The government has allowed for consortia to be formed for the Air India bids and these can be companies with an airline, private equity fund or sovereign funds or also entities that are not incorporated entities. It has set a net worth criteria of Rs 5,000 crore for all bidders — this will be computed through a specified formula in case of consortium bids. Though there is a profitability criteria for the interested bidders which is at least three of the immediate preceding five financial years from the EoI deadline, if the consortium has a scheduled airline operator in India as its partner, the condition to meet positive profit after tax shall not be applicable provided the shareholding of such a member is restricted to a maximum of 51% of the paid-up equity share capital of the consortium.

But there is no exemption for foreign carriers that are part of this consortium and they will have to meet positive PAT criteria. The total debt of Air India and Air India Express is to be reallocated and if the current liabilities of Rs 8,816 crore are taken out, Air India’s debt stands at Rs 24,576 crore according to the PIM and this will remain with Air India and Air India Express, giving a big relief to the potential buyers of the airline as it slashes the debt by almost a half. The remaining debt will be allocated to Air India Asset Holding Company. Assets of Air India amounting to Rs 45,915 crore both in land and buildings, subject to clearance from interested stakeholders and parties, will be allowed for use for a period of two years or more from the time the proposed transaction is completed. However, AI will have the right to use of the corporate office in New Delhi for a period of two years or more but all other land and buildings owned, leased, licensed or possessed by AI, including ownership of Airlines House in New Delhi, constitute a part of non-core assets and shall not form part of the proposed transactions. The transaction also excludes the articles of art and artefacts that are in possession of Air India to be bid out. AI, the document said, is in a process of commencing the necessary formalities as per extant regulations for the purpose of transferring the non-core assets to Air India Asset Holding.

“This winner of Air India will get a significant share of the third-largest aviation market in the world almost overnight, leapfrogging many established carriers. Deep-pocketed players intent on the long haul will find the offer attractive. Although complete details are yet to emerge — which will be given at the time of RFP — passing on the debt and liabilities will cause some anxiety, more details will decide the course of bidding,” said Jagannarayan Padmanabhan, director and practice lead, transport and logistics, Crisil Infrastructure Advisory. Budget carrier IndiGo is the only airline that has submitted to the government in writing its interest in the Air India divestment process. In June 2017, the Cabinet Committee on Economic Affairs gave in-principle nod to the strategic disinvestment of the airline, which has been surviving on taxpayers’ money with a total debt of over Rs 50,000 crore. Subsequent to the decision, the Air India Specific Alternative Mechanism, headed by finance minister Arun Jaitley, was set up to decide on specific issues.