The intangible asset sale for the Indian government
The crisis of India’s third biggest Air Carrier Air India is a headache for Indian government. The carrier is been in the news for its debt-ridden problems for the past few years.
Unable to meet with the problems arisen from the government revenues, the government has been trying to sell the Company to private investors. But finding a prospect buyers is not seen as a possible scenario in the near future. The effort to draw bidders has been tried in the year 2018 but the attempt was unsuccessful with no possibilities in that year.
The Modi government is also tried to reduce the eligibility criteria to attract more buyers bidding for the carrier and leaseback of aircraft. But why there have been no interested buyers for the past few years for the third biggest carrier in India. The story is an interesting one. Let us dig deep
Air India is India’s third Biggest Air carrier with its ownership lies with the government of India. But the carrier is in huge losses for the past few years. For many times in the past, the government tried to revive the carrier by providing the possible stimulus from the financial package. But all the efforts were not able to revive it back and bring it to profits. The debt of Air India has been increasing year on year and it almost $8 Billion.
Now to reduce the burden on the government and to improve the efficiency of the carrier the government has decided to privatize the company.
The decision to privatize the company and make it sustainable in the market is a strategic and important decision because here we need to understand a few things. Air India, has been in operation for many decades and suffering of India’s biggest air carrier is no good for the Indian economy. And at the same time, there are millions of jobs that are dependent on the company and hence it is important to provide safety to these jobs. Any crisis in the company for longer will affect the lives of the employees of this carrier.
Air India, which started in 1932 as a mail carrier before winning commercial popularity, saw its fortunes fade with the emergence of cutthroat low-cost competition. The state-run airline has been unprofitable for over a decade and is saddled with more than $8 billion in debt.
The government wanted a complete exit from the company. But in the bid, there is a restriction on the eligibility of bidders. These are the terms which are narrowing down the possible dibbers for taking over the Carrier. The terms are very clear that the ownership must lie with the Indian nationalists. The government doesn’t want the ownership to be transfer to any foreigner or foreign company. This is a strict regulation that existed in all the call for bidders notifications.
The other criteria announced in the latest notification calling the bidders is
- Bidders to accept 232 billion rupees ($3.3 billion) of Air India’s total 600 billion rupees debt; compared with 333 billion rupees when a sale attempt was made in 2018
- The minimum net worth of bidders lowered to 35 billion rupees from 50 billion rupees
- In case of a consortium, the lead member can hold a maximum 26% stake instead of 51% required earlier (minimum shareholding fixed at 10%)
- Terms include one-year lock-in for sale of shares and the business must be run for three years
- Ernst & Young LLP India is transaction adviser
To make Air India more lucrative this time, the government has invited bids for its entire stake in Air India, including a 100 percent ownership in overseas budget carrier Air India Express Ltd. and a 50 percent stake in ground handling unit Air India SATS Airport Services Pvt. Ltd as reported by BloombergQuint.
Any foreign airline can buy up to 49% in the carrier but not more than that to keep the ownership with in the country.
Air India is the prestige airline for the Indian Government. the carrier has been in operation for many decades. It is not an easy decision from the government side to throw it into private hands. But the decision is a long thought and carefully analyses.
The government in the past has several times tried to revive the carrier. It has provided the possible financial package from the revenue to convert the debt into profits. But the efficiency of the carrier is deteriorating over the years. The revenue has been dropping year over year. The hope of the government to revive it has fallen over the years.
And when all the options are used, the government has tried to sell a 50% stake in the carrier in 2018. And during this time the decision is criticized by many including the opposition considering the importance of the carrier for India. But the government has proceeded forward calling for the bidders.
Initially, Indigo has shown some interest in the stake. But later it was announced that the joint partnership with the government does not seem to be a possible option for it. hence they backdropped later. With no bidders, the Air India was left to suffer on its own.
But the government has been on the try to find the bidders. Later this year the government has relaxed some norms in the eligibility criteria and also it allowed for complete 100% sale of Air India’s Overseas Budget carrier and a 50% stake sale in ground operations. this was made to attract possible bidders and also there are some relaxations that are made on the eligibility part. And most importantly there is no relaxation on the part that the ownership must lie with the Indian national, i.e, more than 51% must be owned by an Indian. The foreign air carrier can buy up to 49%.
Even with these relaxations and government hard search for possible bidders, there seems to be no possible interest from anyone. So the future seems to be uncertain for the carrier. The pandemic has also affected the carrier very badly and the employees are the one suffering from pay cuts and no salary for months.
The Market after the pandemic is a challenging one for Air India. With debt on its balance sheet and less cash flow in its books and no possible bidders, the future of India’s Biggest air carrier is uncertain.
Until then see you in next article.