Mumbai: State-run Air India Ltd has converted loans worth 1,150 crore, extended to two of its subsidiaries, to equity, two airline executives said. The move helps improve the finances of the subsidiaries and may be a precursor to their likely divestment in the future.

The national airline has converted its 750 crore loan to Air India Charters Ltd—which runs the international low-fare airline Air India Express—and a 400 crore loan to Air India Air Transport Services Ltd, its ground handling unit, into equity.

Post conversion, the equity base of Air India Express and Air India Air Transport Services will go up to 785 crore and 402.25 crore, respectively.

“This will strengthen the net worth of these two subsidiaries and will improve their debt-equity ratio. Conversion of loans into equity will give more comfort to the lenders, and strengthen the equity base of companies to lend. This also indicates the promoter’s interest in the company," said one of the two executives, both of whom spoke on condition of anonymity.

The executive mentioned above added that converting the loans into equity would reduce the interest burden on the subsidiaries. The move would help ease their divestment in the future, should the parent airline sell its stakes in them, the executive added.

Debt-laden Air India is among 65 public sector units identified as loss-making by the ministry of heavy industries last month. The government has decided to shut down five of them, without mentioning if Air India is in the list.

On 25 March, Mint had reported that Air India, the country’s largest airline by fleet size, is expected to post a small operating profit in the year starting 1 April 2015, in the first sign that the ailing national carrier is beginning to turn around.

Air India is expecting Air India Express to report a net profit of 100 crore for the current financial year while the ground-handling unit is expected to post a marginal net profit.

India’s oldest airline is surviving on a 30,000 crore government bailout package approved in April 2012. The airline, which had a total debt of 40,000 crore as of 31 March, is expected to turn around its finances by 2018-19, according to the first Air India official mentioned above.

“The conversion of loans into equity in the subsidiaries is a step in the right direction. It also indicates that the government-owned airline is keen to sell a portion of stake in these companies in future," said an airline consultant on condition of anonymity.

However, he added that these measures would not address the fundamental problems of the airline.

Separately, Air India has asked the government to consider the 4,000 crore equity infused into the airline as a grant.

“Air India had got 4,000 crore from the government in 2012 as a part of turnaround and financial restructuring plan. This money was infused to address the high interest costs then. We have asked the government to treat this infusion as grant instead of equity," the second executive quoted above said.

He added that Air India has requested that the amount be treated as a grant in the context of the 2,500 crore allocated to the airline in the Union budget for 2015-16 as against its demand for 5,000 crore.