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