Why is the government selling Air India?

India’s flag carrier is deep in losses and debt, and is surviving on a taxpayer bailout. Under a plan approved in 2012, the government has so far given Air India about Rs26,545 crore in equity. In an attempt to make the airline sustainable, the government has decided to sell a controlling stake. The idea is to find a buyer who can turn around Air India. Government policy allows privatisation of loss-making state -run enterprises.

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Why is the Air India sale important?

In India, stake sales in state-run companies have three main objectives: (1) Get profit-making firms listed; (2) raise capital from the market through follow-on offers for listed companies which need funds for investments; and (3) strategic disinvestment or privatisation for companies that fail in efforts at turning them around.

There are two larger reasons why governments should not run businesses. One, private companies are more efficient and can respond quickly to changing market dynamics. Two, the policymaker controlling a business competing with the private sector is not desirable from a competition perspective.

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What’s on offer?

The government is selling 76% stake in Air India Ltd, along with 100% stake in low-cost international carrier Air India Express Ltd and 50% in Air India SATS Airport Services Pvt. Ltd.

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How will it impact the market?

Air India and Air India Express together have a 12.3% domestic market share and 42.8% of the international market. If an airline wins Air India and its subsidiary, the deal will bolster the buyer’s market presence. The two companies serve 54 domestic cities and 43 international cities. Air India’s international service, the largest among all Indian carriers, will be a major attraction for a buyer. Investors who are not in the airline business can also bid.

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What about the sale process itself?

After deciding on issues such as the stake to be sold, the units to be divested, eligibility criteria for bidders, amount of debt to placed on the companies to be divested, foreign shareholding to be allowed and the best way to protect employees, the government has entrusted execution of the deal to transaction adviser EY to ensure confidentiality and integrity. Although an independent valuer will set a reserve price, it will be kept confidential so that the reserve price does not influence the bids in any manner.

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How is the transaction structured?

Entities with at least Rs5,000 crore net worth and positive profit after tax in three of past five years can bid. They must stay invested in Air India for at least three years, and also have an obligation to get the company listed. Listing ensures higher disclosure requirements and regulatory oversight, apart from the public getting an opportunity to become shareholders in the company. The government will sell some of its residual stake in the public offer. Interest-bearing debt of only Rs24,576 crore will remain with the companies after the stake sale. Air India had an outstanding debt of Rs48,781 crore as on 31 March 2017.

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