The failure of the attempted disinvestment of Air India that did not result in any takers and has since been “shelved”, was publicly attributed to the condition that the government of India (GoI) would continue to hold 24 percent stake in the airline after disinvestment.
For now the plan for disinvestment in Air India has presently been “shelved” and the GoI is considering injecting additional Rs 2000 crores of the taxpayers money into the airline. It is clearly unsustainable and sooner than later a disinvestment of Air India will necessarily have to be undertaken. However, the devil is clearly lurking in the details and till such time as it is unravelled, potential investors will continue to be spooked.
GoI Complete Disinvestment? Not Possible. Not Advisable
It is clear that the GoI cannot totally exit Air India Limited. The option of offering 100 percent exit will not result in success. This is because the dismal financials of Air India necessitates the continued role of the government and it cannot overnight exit the framework.
For starters all of the aircraft loans and working capital loans have been given to Air India on the basis of GoI guarantees. If there is a 100 percent divestment by the government, Air India Limited will overnight cease to be eligible for being supported by such guarantees, since the General Finance Rules (GFR), 2017 which govern the issuance of GoI guarantees, completely prohibit issuance of government guarantees for the private sector.
If exemptions are indeed worked out through amendments to the GFR rules to ensure the continuation of the guarantees, then this it could well result in the first privately held company whose entire working capital loans and primary asset financing is guaranteed by the GoI.
This, however, is not advisable, particularly since a bulk of the GoI guarantees relate to external commercial borrowings and are exposed to foreign exchange fluctuation risk.
To get an idea of the issue, one needs only to see the fact the GoI guarantees for Air India currently support: (i) Rs 13,600 crore of NCDs, (ii) Rs 7445.7 crore of future financial leases for aircraft, which includes guarantee towards 21 Boeing 787-8 Dreamliner planes, (iii) Rs 18273.8 crores of financial leases for existing aircraft fleet and equipment, (iv) Rs 3714.2 crore of loans for aircraft, and (v) Rs 1155.2 crore short term/working capital loan. This aggregates to a total of Rs 44,189 crores (approx.) of loan facilities of Air India Limited being based on GoI guarantees.
The guaranteed loans include Rs 13,600 crores of NCDs issued at an interest rate ranging from 9.08 percent to 10.05 percent, which are to be redeemed between March 2020 to December 2031 with no Debenture Redemption Reserve having been created due to the absence of earned profits by the Company.
It should also be noted that Air India has disclosed that it provisions fee to GoI at 0.5 percent of the loan guaranteed and that it has sought waiver of an aggregate of Rs 359.44 crores of guarantee fee that is above the provisioning at the rate of 0.5 percent of loan amount fee and has also not paid GoI its guarantee fee of up to Rs 1065 crores, and for this, Air India has applied for a waiver! However, the General Finance Rules, 2017 specify the imposition of a guarantee fee but do not provide any discretion to waive the guarantee fee.
Thus, complete exit of GoI from the equity of Air India Limited cannot be taken as a viable option, unless apart from acquiring the 100 percent equity, the bidder has the capacity to immediately replace the GoI Guarantees and the support the restructured loans as the terms are bound to change once the sovereign guarantee is removed. As of March 2017, the 100 percent equity of Air India amounted to Rs 26,753 crores. Adding immediate substitution of Rs. 44,189 crores (approx.) of GoI guarantees, the cost of acquiring GoI's 100 percent equity even at par will be more than Rs 70,000 crore (approx.). This is an acquisition cost of more than $ 10 billion. Then the acquirer will have to restructure the debt.
Even if an exemption is provided to the GFR for continuation of GOI guarantees, it is not prudent for such large GOI Guarantees to be available completely for a management in which the sovereign guarantor has no role.
There is then the issue of the implementation of the Justice Dharamdhikari Committee Report on revised basic pay the complete implementation of which is pending and for which provisioning amounting to Rs. 1,298.16 crores have been made as an exceptional item in the 2016-17 accounts.
Public Offer: May Have Size & Disclosure Issues
Some reports suggest the possibility of a public offer in the future. It is questionable whether Air India will even meet the prescribed general conditions prescribed by Sebi to make a public issue even though there are various exemptions and relaxations to conditions provided for government companies for a number of such conditions.
Even if Air India meets all the requirements, the required levels of disclosures may not be possible to be achieved; as even the 2016-17 Annual Report of Air India has notes indicating that certain disclosures are not being made due to “complexity of transaction” and that “the same is not likely to be material”.
As of March 31, 2017 the 100 percent equity of Air India comprised of Rs. 26,753 crores. If 74 percent is sought to be diluted it would be a Rs 19,800 crore issue. That would be higher than the largest Indian IPO which was of Coal India at Rs 15,200 crore (that occurred in 2010) or that of GIC (Rs 11,256.83 crore in 2017), both of which government companies had fundamentally sound financials and were operating in near monopoly and highly regulated sectors. It would be a stretch on the underwriters to underwrite this size of a public offer for a company in the situation of Air India, particularly considering the intensively competitive aviation sector in India. A failure of the public officer will be a set back to the overall disinvestment initiative of the government and should be avoided.
Solution: Change The Structure, Maintain the Objective
The underlying requirement of the government seems to implement a structure whereby GoI remains in Air India to the extent required, with the management and operational control being assured to the new entity that takes over Air India and, at the same time providing isolation from unacceptable risks from the new entity.
An option that the government should explore is that of creating a holding level limited liability partnership (Holding LLP) for Air India and invite proposals to become the new owner by being the majority partner of the Holding LLP.
The LLP agreement can demarcate the role and responsibilities between the GoI and New Owner and at the same time vest and assure the New Owner of control while allowing GoI to not be burdened with financing future operations and management. This will allow for the GoI to continue in Air India without creating control and operations issues on the management of Air India as the role and scope of rights of GoI in the Holding LLP will be clearly identified and limited.
Similarly, the obligations and performance milestones of the New Owner will also be identified. The LLP Agreement at the Holding LLP level will enable the selected entity to obtain the required level of comfort of management control and limitation of liability to unacceptable risks within the Air India structure and provide for a clear path in resolving the issues resulting in an ultimate exit of the Government.
The flexibility of the LLP structure would allow for induction of additional partners and eventual exit of government of India altogether.
Piyush Joshi, partner, Clarus Law Associates, specialises in energy, infrastructure projects and project financing.