How govt managed to sell albatross

Three prime ministers, two aborted missions, multiple rule changes and two decades later, India has finally been able to execute the country’s most complex asset sale — privatise its national carrier, Air India.

“What is different about the process this time is bureaucrats got complete independence to run the show. The finances of the government were stretched so thin, especially after Covid, that there was a message from the political masters to treat it as a distress sale. Close the deal before the firm stops being a going concern, we were told,” said an official involved with the process.

A special panel of ministers was formed for Air India’s privatisation.

“That tells you a lot about the intent of the government to sell the company,” the official said, adding that one of the ministers in the panel often described the company as an albatross around the government’s neck.

The Modi government’s intent to privatise the airline was first reflected in the Economic Survey of 2017, when then chief economic advisor Arvind Subramanian noted that the disinvestment would help boost Indian airlines’ international market share.

The clearest indication that the government was ready to bite the bullet came on a Sunday evening in 2017 when then finance minister Arun Jaitley in an interview to Doordarshan said his government was trying the “art of the impossible”, and that the phenomenal growth of the sector had given the government a “historic second chance” to lure a strong investor to run Air India.

The first chance that he was referring to had come in 2001, when a freshly minted disinvestment ministry led by Arun Shourie and Jaitley had put a 40 per cent stake of the airline on the block.

A number of foreign airlines, including Lufthansa, Swissair, Air Francedelta, British Airways, Emirates and Singapore Airlines (SIA), along with the Hinduja and the Tata groups, had expressed interest in buying the airline.

But when the government mandated that there had to be a local partner, most airlines pulled out. The Hindujas, who were embroiled in the Bofors issue, were disqualified.

Tata’s partner, SIA, cited “adverse climate and opposition to privatisation”. The adverse climate it was referring to was the bombing of the Colombo Airport attack by LTTE in which SIA suffered loss due to damaged aircraft and accusation by parliamentarians that the shareholders agreement had been changed to suit TATA-SIA.

Pradip Baijal, then secretary of the disinvestment ministry, says the accusation of corruption was only for political reasons but caused a major delay. “The CEO of SIA wrote to me saying that the reason they were backing out was the Colombo Airport attack and the delay in disinvestment which very often leads to withdrawal of foreign airlines.

I felt sorry that a very good airline like SIA had withdrawn,” he said.

Govt stake

When the bid documents were published in 2018, the Centre decided to hold on to a 24 per cent stake in the airline.

A former top finance ministry official said it was again the political opposition that pushed them to be conservative. But prospective investors saw this as a big negative. The process ended in an embarrassment for the government as it failed to get a single bid.

By then the Department of Investment and Public Asset Management (DIPAM), had undergone a change of guard. Atanu Chakraborty was appointed as secretary. “Chakraborty’s role has been crucial. I think his experience of overseeing multi-billion-dollar exploration projects in the petroleum sector gave him the pedigree of formulating rules which was the key behind his success,” said a banker involved in the process.

Under Chakraborty’s stewardship, the government approved a key change in the privatisation process and allowed officials to take part in roadshows.

“This was a big hurdle as any willing buyer will want to have a heart-to-heart talk with the seller (in this case, the government). The seller also gets a perspective of the actual appetite of the buyer. Sometimes we are more optimistic or pessimistic than the bidder about the asset we are selling. The roadshows gave us a perspective that the employee size was a minor issue for the Tatas. They were more concerned about the huge debt,” a government official who participated in Air India’s roadshows said.

It was under his successor Tuhin Kanta Pandey that the second bid document was released. By then the government had learnt its lesson and put 100 per cent of Air India on the block. It also decided to absorb 30 per cent more in debt and liabilities than in the

THE SALE PROCESS MAY BE USED AS A CASE STUDY FOR FUTURE ASSET SALE AND PRIVATISATION BIDS

previous attempts.

Moreover, the condition that the new owner will not be able to merge Air India into an existing business for three years was waived. The condition was a thorny issue for the Tata Group, which operates Vistara and Airasia India.

But then the pandemic upended the aviation industry and the Tatas, who had developed a business plan to acquire the company, started getting cold feet.

During a virtual roadshow, the Tatas expressed their reluctance to absorb the debt which was around ~24,000 crore. Pandey, whom his colleagues describe as a “very practical person”, realised that he needed to further sweeten the offer.

In July, when the country was being unlocked, Pandey and merchant banker EY organised a presentation for Home Minister Amit Shah and his five colleagues. It projected that if the government wanted to stop the process and resume it after the pandemic, it would cost the exchequer ~15,435 crore, or around ~620 crore per month.

Instead, they suggested that the government eliminate any pre-fixed debt level and allow bidders to quote an enterprise value based on combined debt plus equity value — a model not tried before in the privatisation exercise.

The next step was to ensure that all labour and HR issues were sorted out before the handover. A series of negotiations, such as the government agreeing to clear medical, retirement benefits and pending arrears, ensured that the Tatas would not have to face warring employee unions after the takeover.

Officials say the learning from this disinvestment has been so immense that it will be used as a case study for future asset sale and privatisation processes. “It will be a happy homecoming and not a saas-bahu drama. There will be no dharna, morcha and hartal. Privatisation is no more a dirty word,” a minister who is part of the panel said.