India: A total exit by the government from Air India is not possible and neither advisable

Last Updated: 21 September 2018
Article by Piyush Joshi

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.

Originally published by CNBC TV18, June 2018

Piyush Joshi, partner, Clarus Law Associates, specialises in energy, infrastructure projects and project financing.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
 
Email Address
Company Name
Password
Confirm Password
Position
Industry
Mondaq Newsalert
Select Topics
Select Regions
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions