The Union government has shot down an ambitious debt-raising plan by Delhi International Airport Ltd, or DIAL, to part-finance the modernization of the airport in the Capital by seeking deposits and selling bonds to private developers looking to lease space at India’s second busiest airport.
Through its Delhi Aerotropolis Pvt. Ltd unit, DIAL had planned to secure a Rs2,835 crore refundable deposit for a period of 28 years, apart from a licensing fee, for leasing out 45 acres of land to realty firms through a bidding process initially planned for this month.
A deal structured thus would have reduced the revenues of DIAL while easing financing costs. But, DIAL is to share nearly 46% of its revenue with the government, which would have ended up getting less money than anticipated under a 2006 privatization deal.
The ministry of civil aviation has concluded that DIAL’s financing method would reduce substantially the shared revenue for the state-owned Airports Authority of India, or AAI, because the security deposit and bonds may not be treated as revenue which the government can lay claim to.
“It is just not going to be allowed (and) it has been communicated (to DIAL),” said a senior government official familiar with the process who didn’t want to be named.
DIAL says it remains confident the issues would be resolved. “The matter is under discussion. No final decision has been taken yet,” said Madhu Terdal, chief financial officer, corporate strategic finance, GMR Group.
The AAI, which owns 26% of DIAL, has sought legal opinion on the airport developer’s plan. Hyderabad-based GMR Group holds 50.1% of DIAL’s equity with Frankfurt airport operator Fraport AG and a unit of Malaysian Airports Holding Bhd. each owning 10%. Private equity player India Development Fund has a 3.9% stake.
DIAL had recently issued tenders for leasing out up to 5% of the 5,050-acre New Delhi airport land that it is permitted to develop for commercial purposes.
Under the proposed tender, Delhi Aerotropolis had proposed to secure a lumpsum fee (amounting to atleast Rs2,835 crore) as a refundable deposit for a period of 28 years, apart from a licensing fee, for leasing out airport land to private developers.
A separate unit, DIAL Cargo Pvt. Ltd, has been floated for handling cargo operations. Formation of these subsidiaries, the AAI has concluded, is a breach of guidelines under the 30-year operations management development agreement signed that DIAL has signed with it.
According to the agreement, the formation of subsidiaries will mean that parent company DIAL becomes just a holding firm instead of an operating company, leaving the government out of the decisions it takes. Besides a major chunk of the business at the airport that could have been shifted from the holding company, there was also the danger of losing board-level control at the unit, says the official. Unlike the 13-member board of DIAL, where the government has three full-time members, the new companies do not have any government representative, people familiar with the process said.
Initially, the formation of these subsidiaries was cleared by the DIAL board. But after the tenders were floated last month, the government told DIAL to “desist from taking any further action” until the matter is resolved.
GMR’s Terdal said there was no need to interrupt the current tendering process, which will be closed within the next three-four weeks. “The bid process is on. We are taking into consideration the legal complications (the revenue sharing with the government).”
For its part, DIAL believes the two units will help streamline operations and focus instead on developing the main airport. The New Delhi airport added Rs48 crore to publicly held GMR Infrastructure Ltd’s Rs562 crore revenues in the first quarter of this fiscal year.
An estimated Rs8,800 crore spread out over several phases is being spent on upgrading the airport. The first phase of the airport modernization is to be completed by 2010, just in time for the Commonwealth Games scheduled to be held in the Capital. Construction for the proposed hotels, critical to host the international tourist traffic for the Games, could be delayed.
“GMR Infrastructure had a debt-equity ratio of 1.86 (as of 31 March). We, therefore, believe it is not well placed to raise more debt,” said Nitin A. Khandkar, vice-president of research with Keynote Capitals Ltd. However, “raising through dilution of equity, that too at a good valuation, should not be a problem.”