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The government of India was caught between Scylla and Charybdis with Air India, as it was neither possible to revive the company by putting in more money, nor was there an option to liquidate it, considering the larger interest of stakeholders. By August-end, Air India’s total debt had risen to 61,562 crore, mostly raised via sovereign guarantees to fund its losses.

The Tata Group has effectively taken over nearly a quarter of Air India’s total debt for 100% ownership. It will retain its 12,000 odd employees for a year. As per the agreement, Tata Group will stick to a business continuity clause for three years and also retain its brand for five years as part of the divestment deal. A special purpose company, Air India Assets Holding Ltd (AIAHL), has been formed to take up the remaining debt of 46,262 crore and approximately 14,718 worth of assets, which include real estate. This will be monetized over the years to pay back lenders, whose loans are now backed by a government guarantee. This guarantee will ensure that lenders do not face a haircut.

The question that some observers have raised is whether this was the best possible option available to the government to revive Air India. There is no denying that selling the airline to a private player was the best and only option left with the government, considering its incremental losses and our bleeding economy. Any more fiscal support or a continued government guarantee would have been worse for the country. if executed well, the government’s monetization plan can yield sums of money sufficient to make the bulk of the airline’s debt payable. In particular, the prime real estate that the government has retained can be capitalized upon for the purpose.

Some argue that Air India would have fetched a better price under the resolution mechanism of the Insolvency and Bankruptcy Code (IBC) than through a direct sale of its equity. This is a flawed argument. Under the IBC, the fate of Air India would have been worse. Most of its aircraft were on lease and the airline has been defaulting on payments. In December 2020, a UK court had rebuked Air India for its unpaid dues of over $17.6 million to China Aircraft Leasing Company Ltd (CALC) as part of an aircraft lease agreement for rent and maintenance. If the case had come under the IBC, Section 14 of the Code would have not allowed repossession of the property once a moratorium was declared. This would have been detrimental for preserving the value of the aircraft. It would also have resulted in massive maintenance expenditure. More importantly, under the IBC, such lessors are treated as operational creditors and face a higher risk of a large haircut as part of any resolution plan.

The government, thus, has exhibited both wisdom and pragmatism by embracing privatization. However, the excitement of holding onto good assets attached to bad loans may take the government one step forward and two steps back. Efforts to sell some of the property at sought prices failed last November and the company had to make a renewed bid to raise funds by auctioning about 38 real-estate assets, including some that it could not sell in the previous auctions, by lowering the reserve price of some properties. This June, it sought bids for a number of its properties with the objective of raising 270 crore. The final result is still awaited.

Two things are now critical for the success of the deal. First, AIAHL’s ability to implement an effective monetization scheme and pay back the debt taken on. Second, Tata’s ability to bring efficiency to the system. The former would be a steeper challenge if the government tries to play alone, given its inexperience with asset monetization. A better approach could be to join hands with private players to increase the efficacy and value of the programme. It could be done under the National Monetisation Pipeline, with private players sought to be engaged that can deliver expertise in execution and planning. A lack of identifiable revenue streams for various assets, their level of capacity utilization, dispute resolution mechanisms, etc, are likely to be key challenges in the execution of the monetization plan of Air India’s assets held by AIAHL. Well-structured monetization transactions will likely hold the key to success.

Some ideas from mortgage-backed securitization in the US could be adopted, with adequate safeguards in terms of a liquidity facility and insolvency insulation. The securitization of rent proceeds through a special purpose vehicle, for example, could yield good results. Also, the government should focus on developing India’s debt market while increasing transparency and raising governance standards. Investor confidence is critical to the success of any debt market. The development of such a market is determined by its depth, breadth, resilience and choice of instruments available to cater to the requirements of market participants. We have made commendable efforts in this direction, but as the cliché goes, “Picture abhi baaki hai." There is more to come.

Air India’s case should serve as a reminder for all time that it is not the business of a government to be in business, especially where private players can play a more effective role. The government should be a referee, not an active player. Privatization is a bitter pill, but it’s one that will cure India’s malaise. It will drive efficiency and is a mantra for building a “New India". The current government has made a good start and it is now the follow-through on which success depends.

Neeti Shikha is associate dean, Indian School of Public Policy, New Delhi. These are the author’s personal views.

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