BackHow Air India sale can spur govt’s divestment agenda
Mint dissects the reasons that make the sale of the carrier important for all stakeholders
PremiumThe government plans to sell Air India to a strategic investor this fiscal. Such a sale of a state-owned unlisted company could give a fillip to the government’s divestment programme and spur stock markets in India. Mint dissects the reasons that make the sale of the carrier important for all stakeholders and how this could encourage stock market investors.
How is the plan to sell Air India different from other divestments of state-owned companies?
The government wants to sell Air India to a strategic investor, which means it will sell to someone interested in running the airline. Most of the major government divestments in its firms in the last 20 years have taken place through IPOs or an offer for sale of an already listed firm. Such sales are politically safe as the government retains majority control, letting it appoint the management and also manage the optics. A strategic divestment of a PSU, where the government is directly a majority owner, to a private party hasn’t happened in more than 15 years.
What message could the sale send?
Governments in India are socialist in nature. Selling a public sector firm is akin to selling the family silver and governments are shy of being seen doing so. The last strategic divestment that led to a government firm being sold to a private party and not another government entity was in 2003-04, when Jessop and Co. Ltd was sold to Indo Wagon Engineering Ltd. No such strategic sale has happened since. The sale of Air India will send the message that the government is serious about exiting companies it has no business running. This could give it the experience and confidence to carry out more such sales.
Why is the govt willing to exit the airline now?
Last year, the government attempted to sell up to 76% stake in the airline, but did not receive any bids. Experience from previous strategic sales indicates that the acquirer is not happy to have the government retain a stake in the company and have its nominee sitting on the board. Air India paid an interest of ₹4,155.68 crore on its 2017-18 debt of ₹55,305.82 crore at the end of March. The airline’s consolidated net loss was ₹5,761.02 crore, which followed a loss of ₹7,034.18 crore in the previous year. These operations are unsustainable as the government is hard-pressed to fund its social welfare schemes.
What about FDI in aviation?
The Centre allows 100% FDI in airline firms, but foreign carriers can hold only up to 49%. The FY20 budget says that the Centre would study suggestions of further opening up FDI in aviation. But few business houses and banks in India have the cash to fund an acquisition of Air India’s size. The sale could thus trigger changes in FDI norms and give a fillip to the Centre’s divestment programme.
In what other ways is the sale important?
Various taxation-related proposals in the budget have spooked investors. Stock markets hate uncertainty and love bold economic reforms. Air India’s sale would show investors the Centre’s intent to exit businesses and focus on administration. It aims to garner ₹1.05 trillion from the sale of its shares in PSUs this fiscal. This is the highest ever divestment target set by the Centre. The Air India sale could be a significant contributor to the targeted kitty.
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