Last month when the deputy chairperson of Maharashtra Legislative Council Vasant Davkhare alleged large-scale corruption in the construction of skywalks, everyone was stunned. The government, as usual, assured an investigation into the charges.

Skywalks or the foot over bridge are an effort to give the pedestrian much needed space to walk as more and more footpaths were disappearing...

Premium Content

Monthly Digital Access

Subscribe

Already A Subscriber?

Login

Yearly Digital Access

Subscribe

Moneylife Magazine Subscriber or MAS member?

Login

Editors' picks

Consumer Issues

The Consumer in the Age of Coronavirus

Dr Philip Kotler

Nation

50 Pearls of Wisdom Thrown Up by Coronavirus

Dr Rakesh Goyal

Nation

Government Dangerously Close to Going Wrong on Containment o...

Veeresh Malik

Nation

India to Provide Rs1.70 Lakh Crore Relief Package to Weaker ...

Moneylife Digital Team

Investor Interest

Twice as Nice?

30 July 2009

First came the small and mid-cap funds because these were hot ideas. Then came infrastructure funds because infrastructure was a hot sector. Now, we have a fund that combines the two, probably because the fund company believes in the principle that you can never have too much of a good thing, or in this case, two good things. Tata Small and Mid Cap Infrastructure Fund, which has just...

Premium Content

Monthly Digital Access

Subscribe

Already A Subscriber?

Login

Yearly Digital Access

Subscribe

Moneylife Magazine Subscriber or MAS member?

Login

Investor Interest

Air India’s bailout to cost government dear

30 July 2009

Protracted delay in implementing Disinvestment Commission’s suggestion on Air India’s (AI) bailout is today likely to the cost the government dear. AI had asked for financial support to the tune of Rs1,000 crore a decade ago, but now the government will have to dole out a whopping Rs10,000 crore. This is owing to government’s procrastination in implementing suggestions given by GV Ramakrishna, former member of the Planning Commission, and former chairman of the Disinvestment Commission, a decade ago. Mr Ramakrisna’s recounts what went wrong:

In its 8th report tabled in August 1998, the Disinvestment Commission examined various options for dealing with the problems of AI. The actual financial figures given in that report are naturally different from the latest financial figures available, but the basic recommendations are valid even today. Four options were examined.

Option1: The first option said there would be no financial support by the government and no disinvestment. AI’s financial performance is bound to deteriorate further and would become a sick company in the near term. Sickness of AI would result in total dominance of traffic in and out of India by foreign airlines, with attendant consequences.

Option2: While examining the 2nd option of continual sustenance support, the Commission had pointed out that unless AI’s operating performance improves substantially, the benefits of financial restructuring would not be sustainable in the medium term. Similar fund infusion would need to be repeated at regular intervals, implying recurring and substantial financial burden on the exchequer.

Option 3: The 3rd option was related to government support of Rs.1,000 crore as suggested by AI at that time, but meeting fleet replacement, modernisation and expansion would have cost Rs.20,000 crore.

Option 4: The 4th option involved government support of Rs1,000 crore for immediate financial relief followed by strategic sales. The Disinvestment Commission recommended that option four be adopted and following steps were recommended:

The government should immediately provide Rs1, 000 crore as equity, as per AI’s estimate for financial restructuring of the carrier which would raise it’s paid up share capital to Rs1, 154 crore.

Simultaneously, initiate process of induction of a strategic partner in AI, on the basis of global competitive bids, through issue of fresh equity shares of the face value of Rs770 crore. This would enhance the paid-up equity capital in AI to Rs1, 924 crore and reduce government holding to 60%. The strategic partner should be a consortium of airlines and investors, with at least 25% of the equity brought in by the consortium which is held by Indian investors. The selection of strategic partner should be through global competitive bidding among the pre-qualified bidders based on their financial, technical, marketing, managerial capabilities and commitment for AI’s fleet expansion. A shareholder agreement providing for an appropriate share in the management to the strategic partner would also be necessary.

Government should thereafter disinvest 20% of the total paid up equity capital by offering 10% to domestic institutional investors at the price paid by the highest bidder for AI shares and the remaining 10% to the retail investors and employees at a discount. Any shares not taken up by retail investors and employees may be offered to domestic institutional investors. This would eventually bring the government shareholding in AI to 40%.

After implementation of these steps, government and the strategic partner would each hold 40% of the equity capital of AI and the remaining would be dispersed among the domestic institutional investors, employees and the public.

Global Advisors may be appointed for assisting the strategic sale and the offer of sale, as already elaborated by the Commission in its first report.

While steps are taken for putting through the strategic sale expeditiously, the following measures may also be taken:
1. The maintenance, engineering and ground support operations of AI, which are inherent strengths of the carrier, could be hived off as separate companies. In line with the current global trend, this would enable AI to benefit from outsourcing of these services and reduce its overheads.

2. Currently, AI connects major international destinations with all major international airports in India. A well-knit and effective hub and strong arrangement with Indian Airlines (IA) would enable AI to provide direct and convenient connectivity with all Indian airports. For this, there should be a clear demarcation of roles which these two airlines have to play in providing better customer service and jointly competing with other international airlines.

3. A voluntary retirement scheme (VRS) should be immediately introduced to reduce manpower.

4. Since airline is a highly service oriented industry, AI should initiate steps to improve quality of its service that will help the carrier in enhancing its market share.

5. In its sixth report, the Commission had given its recommendations on Hotel Corporation of India Ltd (HCIL), a wholly owned subsidiary of AI. The recommendations included sale of Delhi and Mumbai Centaur hotels as separate units, initiation of dialogue with J&K government for Centaur Srinagar and the decision regarding flight-catering services to be taken by AI. AI management should take suitable view on these recommendations while undertaking financial restructuring exercise.

While the Commission was examining the case of AI, the government had appointed a committee to examine the merger of IA with AI. This matter was not referred to the Commission. The committee recommended that IA should be merged with AI with other consequential arrangements. Couple of years ago, the government merged IA with AI without referring to the committee’s recommendations to the Disinvestment Commission, which had table the report in August 1998. The only action taken on the Commission’s report was to segregate AI’s Centaur hotel and go for a strategic sale, which became controversial. It was during the same time when Commission had table its report that AI had asked for financial support of Rs1, 000 crore from the government. Now, after a decade, AI has urged the government for financial support of Rs10, 000 crore.

The situation for AI and the government is dire. Any decision taken now will apply to both the foreign and domestic operations as IA has been merged with AI. The question of surplus employees of AI has not yet been addressed. When the Commission gave its report, the problems were relatively easy to manage. The cost of delay of 10 years has become quite heavy. Mere induction of funds of large amounts of Rs10,000 crore has become bit too heavy. The restructuring of the merged foreign and domestic operations has become more complicated. It is not clear how long AI can manage in both domestic and foreign operations, without major restructuring of foreign and domestic.

It is time for the government to constitute another high level committee with representatives of employees and financial institutions to revisit the recommendations of the Disinvestment Commission and examine the present situation and report within two weeks. It may be possible to unwind and separate AI from IA and with short term government guaranteed support from institutions and offer AI on strategic sale on the lines recommended by the Disinvestment Commission.

The views expressed in the column are by GV Ramakrishna who is the former chairman of Disinvestment Commission, former chairman of the Securities and Exchange Board of India (SEBI) and former member of the Planning Commission.