Finance ministry shoots down Air India plan for Rs 10,000-cr tax-free bonds

By: and |
Mumbai | Published: August 8, 2015 12:57:36 AM

The finance ministry has turned down a proposal by Air India to raise Rs 10,000 crore in tax-free bonds to retire its long-term working capital loans...

Air IndiaThe Air India official told FE the airline was hoping to issue the tax-free bonds at coupon rates close to the benchmark government securities. (Reuters)

The finance ministry has turned down a proposal by Air India to raise Rs 10,000 crore in tax-free bonds to retire its long-term working capital loans citing constraints regarding the government standing as a guarantor for such a bond issue. However, Air India is expected to once again approach the ministry for approval, an official said.

“A proposal has already been moved by ministry of civil aviation to the ministry of finance for issue of guarantee to convert certain long-term working capital debt into non-convertible debentures… The finance ministry has indicated that there are certain constraints regarding the guarantee,” the AI official said, adding, “This issue will be again taken with finance ministry.”

This is the second time such a proposal by Air India has been rejected by the finance ministry. Air India had during 2013-14 made a similar proposal which was rejected by the finance ministry on the ground that such issues were permitted only for infrastructure companies.

The Air India official told FE the airline was hoping to issue the tax-free bonds at coupon rates close to the benchmark government securities.

“We were looking to issue the bonds at a coupon rate of G-Sec plus 50 basis points,” the official added.

At the end of trading on Wednesday the yields on the benchmark G-Sec was at 7.8%. The interest rates on domestic working capital loans are around 13%, about 2-3 basis points above the base lending rate of banks.

The national carrier currently has a total debt of about Rs 44,000 crore, consisting of aircraft-related debt of Rs 22,000 crore and long-term working capital debt of Rs 18,000 crore.

“Raising the tax-free bond is a top priority for us as it will help us to retire the airline’s high-cost working capital debt,” the official said.

The proposal by the airline to raise a tax-free bond is part of the recommendations of the civil aviation ministry-backed RH Dholakia committee, which was set up in 2012 to recommend initiatives to cut costs and increase revenue at the airline.

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