Debt Burdened Air India | The Cabinet Approves 49 Percent Divestment

NEW DELHI: To attract foreign bidders and expedite the strategic divestment of Air India, the Indian Cabinet on Wednesday, 10 January has decided to allow Foreign Direct Investment (FDI) up to 49 per cent in the flag carrier.

The airline, which is under a massive debt burden of Rs500 billion (Dh28.8 billion), had posted an operating profit of Rs1.05 trillion in 2015-16, and is expected to report an improved operating profit margin for the last fiscal.

By allowing this, the Indian national carrier has been brought at par with other domestic airlines which are allowed to attract foreign capital. The decision effectively expands the “universe of bidders” that the government hopes to attract for the airline’s strategic divestment.

The decision to allow FDI in Air India was taken by the Union cabinet in its meeting here that okayed liberalisation and simplification of the FDI policy.

The present rules allow foreign airlines to invest in Indian airline companies up to a limit of 49 per cent of their paid-up capital, which is, however, not applicable to Air India.

“It has now been decided to do away with this restriction and allow foreign airlines to invest up to 49 per cent under approval route in Air India subject to the conditions that foreign investments in Air India, including that of foreign airlines, shall not exceed 49 per cent either directly or indirectly,” an official release said here, following the Cabinet meeting.

“Substantial ownership and effective control of Air India shall continue to be vested in Indian national,” it added.

Albert Tjoeng, Assistant Director, Corporate Communications, Asia Pacific at International Air Transport Association (IATA), said: “The amendment in the FDI policy is a step in the right direction — it removes the exemption that had been prevalent in the policy which is related to a single airline.”

Industry observers opined that the move will attract foreign bidders including foreign airlines to the divestment process.

Foreign players can now come in individually or with other Indian partner to participate in the divestment process whenever it takes-off and get a significant stake.

Independent aviation expert Amrit Pandurangi said: “Air India is not an easy transaction … so 49 per cent is good, but may not be good enough to make it attractive.”

“They need to first sort out a number of issues on Air India’s financial debt, people-related issues.”

Currently, a ministerial group, Air India-specific Alternative Mechanism, headed by Finance Minister Arun Jaitley is looking into the modalities to divest loss-making Air India. The group has been mandated to decide on key issues such as treatment of Air India’s debt and hiving-off of its assets.

Last month, Minister of State for Civil Aviation Jayant Sinha had announced that British consulting multinational EY has been appointed as transaction advisers to aid the government in the strategic divestment of Air India.

Making the announcement, Sinha said the Air India stake sale would most likely be an offering for an integrated airline through the bidding process “and both domestic and international operations will be divested as one entity”.

The Indian national carrier got a new lease of life in April 2012, when the then UPA government approved a Rs300 billion turnaround and financial restructuring package spanning up to 2021.

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