Air India sale: New provision could help attract more bidders

By: |
January 30, 2020 9:26 PM

In its second attempt in as many years to divest loss-making Air India, the government came out with the Preliminary Information Memorandum (PIM) on Monday.

 Air India sale, National carrier, Air India, Preliminary Information Memorandum, PIM, Air India Express, AISATS, Singapore Airlines, Foreign Direct Investment, FDI, Substantial Ownership and Effective Control, SOEC, Government of India

Entities can bid for national carrier Air India on the basis of the financial strength of their affiliates, a proposition that could attract more bidders.

In its second attempt in as many years to divest loss-making Air India, the government came out with the Preliminary Information Memorandum (PIM) on Monday.

The government has proposed selling 100 per cent stake in Air India along with budget airline Air India Express and the national carrier’s 50 per cent stake in AISATS, an equal joint venture with Singapore Airlines.

As per the PIM, a bidder may also “qualify on the basis of net worth of its affiliate, provided such IB (Interested Bidder) itself has a positive net worth…,” subject to certain conditions.

This means that an entity can bid based on the financial strength of its parent, according to a source involved in the disinvestment process.
Such a provision could also help in attracting more bidders.

In case an IB is taking the benefit of financial strength of its affiliate, then the net worth of only the affiliate would be used for the purposes of evaluation of financial capability of the IB, as per the PIM.

To make the disinvestment more attractive, the government has eased the bidding norms. Prospective bidders now need to have a minimum of Rs 3,500 crore net worth.

In 2018, when the government tried to divest Air India, the net worth criteria was fixed at Rs 5,000 crore.

Meanwhile, the source said that complete foreign ownership of the national carrier would not be possible.

Under the Foreign Direct Investment (FDI) norms, the Substantial Ownership and Effective Control (SOEC) framework and provisions in the bilateral agreements, it would not be practical for Air India to have 100 per cent foreign ownership, the source said.

Through the automatic route, a foreign investor or an airline can have up to 49 per cent stake in an Indian carrier. The limit can be 100 per cent under approval route but would not be applicable for overseas airlines.

In the case of Air India, only 49 per cent FDI is allowed through the approval route, the source said.

As per the SOEC framework, which is followed in the airline industry globally, a carrier that flies overseas from a particular country should be substantially owned by that country’s government or its nationals.

In the case of Air India, the government has signed bilateral flying rights agreements with more than 100 countries. As per these pacts, flying rights would be given to carriers that are substantially owned by the Indian government or Indian nationals, the source said.

According to the source, in case the substantial ownership of the carrier is to be changed, then all these pacts would have to be renegotiated. In such a situation, the countries concerned might also ask for increased bilateral flying rights, the source added.

Bilateral flying rights refers to an agreement between two countries that allows each other’s airlines to operate services with a specific number of seats.

Among others, the government would withdraw its guarantee extended to loans taken by Air India.

“Government of India (GOI) may prescribe additional conditions (including but not limited to replacement of all GOI guarantee or other GOI support extended on behalf of the companies) in the Request for Proposal (RFP),” the PIM said.

Qualified Interested Bidders (QIBs) would be required to demonstrate availability of funds for the proposed transaction “including but not limited to appropriate expression of support from financial institution(s)… confirming ability of the IB to discharge all its obligations defined under RFP and definitive documents related to the proposed transaction,” it noted.

The successful bidder would have to take over only debt worth Rs 23,286.5 crore while the liabilities would be decided depending on current assets at the time of closing of the transaction. Air India is in the red for long.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Asus takes a swing at Apple’s iPhone 12 Mini with Zenfone 8, a compact flagship with big battery
2Hardware PLI: Govt cuts manufacturing target by half
3Cabinet nod: Rs 18k-cr PLI push for ACC battery storage