Safe landing for Maharaja’s privatized flight

The Tata group has effectively taken about a quarter of Air India’s total debt for 100% ownership. It will retain its 12,000 odd workforce for one year. As per the agreement, the Tata group will stick to a business continuity clause for three years and retain its brand for five years as part of the disinvestment deal. A special purpose company, Air India Assets Holding Limited (AIAHL), has been formed to take over the remaining debt of ₹46,262 crore and approx. ₹14,718 worth of property, which includes immovable property. It will be monetized over the years to pay back lenders whose loans are now backed by government guarantees. This guarantee will ensure that lenders do not face a haircut.

The question that has been raised by some observers is whether it was the best possible option for the government to revive Air India. It cannot be denied that selling the airline to a private player was the best and only option left to the government, given its mounting losses and our bloody economy. Any more financial aid or continued government guarantees would have been worse for the country. If executed well, the government’s monetization plan could yield enough money to make a large portion of the airline’s debt payable. In particular, the principal immovable assets that the government has retained can be capitalized for this purpose.

Some argue that Air India would have got a better price under the Insolvency and Bankruptcy Code (IBC) resolution mechanism than a direct sale of its equity. This is a flawed argument. Air India’s fortunes would have been worse under the IBC. Most of its aircraft were leased and the airline has been defaulting on payments. In December 2020, a UK court reprimanded Air India for outstanding dues of over $17.6 million to China Aircraft Leasing Company Limited (CALC) as part of an aircraft lease agreement for rent and maintenance. If the case was covered under IBC, then section 14 of the Code does not allow recovery of property once the adjournment is declared. It would have been detrimental to preserve the value of the aircraft. This would also result in massive maintenance expenditure. More importantly, under the IBC, such lessees are treated as operational creditors and face a higher risk of major haircuts as part of any resolution plan.

Thus, the government has demonstrated both wisdom and pragmatism by embracing privatization. However, the enthusiasm to get hold of good assets linked to bad loans can take the government one step forward and two steps back. Efforts to sell some of the properties at the asking prices failed last November and the company had to make fresh bids to raise funds by auctioning about 38 real estate properties, including some that could not be sold in the previous auction. could, by reducing the reserves, cost some properties. This June, it solicited bids for several of its properties to raise ₹270 crores. Final result is still awaited.

Now two things are critical to the success of the deal. First, the ability of AIAHL to implement an effective monetization plan and repay the loan taken. Second, Tata’s ability to bring efficiency to the system. Given its inexperience with asset monetization, the former will be a formidable challenger if the government tries to play it alone. A better way might be to join hands with private players to increase the effectiveness and value of the program. This can be done under the National Monetization Pipeline, which has sought to involve private players who can provide expertise in execution and planning. Lack of identifiable revenue streams for various assets, their level of capacity utilization, dispute resolution mechanism, etc., are likely to be the major challenges in the execution of Air India’s asset monetization plan held by AIAHL. Well structured monetization transactions can be the key to success.

Some ideas of mortgage-backed securitization in the US can be adopted with adequate safeguards in terms of liquidity facilitation and bankruptcy insulation. For example, securitization of rental income through a special purpose vehicle can yield good results. Also, the government should focus on developing India’s debt market along with increasing transparency and raising governance standards. Investor confidence is critical to the success of any debt market. The growth of such a market is determined by its depth, breadth, flexibility and choice of tools available to meet the needs of the market participants. We have made commendable efforts in this direction, but as the saying goes, “there is still more.” There is much more yet to come.

The case of Air India should serve as a reminder forever that it is not the business of the government, especially where private players can play a more dominant role. The government should be the referee, not the active player. Privatization is a bitter pill, but it is one that will cure India’s malaise. This will promote efficiency and is a mantra for building a “New India”. The present government has made a good start and now it is the follow-through on which success depends.

Neeti Shikha is Associate Dean, Indian School of Public Policy, New Delhi. These are the personal views of the author.