New Delhi: Potential bidders have termed the government's 85/15 percent condition pertaining to Air India's (AI) and Air India Xpress Ltd's (AIXL) debt upon disinvestment as 'misguided' and contrary to the government's aim to disinvest Air India successfully and in a way that helps the airline thrive. In the latest set of clarifications released by the Department of Investment and Public Asset Management (DIPAM), while several queries centre around the issue of retained debt, one of the queries raised by a potential bidder said, "We believe the 85% / 15% condition is misguided and contrary to the aim of GOI which is to divest AI successfully on a basis that make the airline thrive. (sic.) The entire EV should be left in the Company in the form of assumed debt."
Under the new bidding structure, interested bidders need to bid Enterprise Value (EV) of Air India, wherein EV will be aggregation of debt and equity of Air India as assessed by the bidder in its financial bid. On the date of closing, debt which is lower of either the outstanding debt of AI and AIXL combined or 85 percent (or lower) of the EV, will remain as debt. "Similar to the process for allocation of residual debt to AIAHL from existing lenders, the debt in AI will we assume be provided by existing lenders to the extent of 85 percent of EV," the bidder said in the query.
The EV that is bid will be paid as to 85 percent in assumed debt and 15 percent in cash. "We acknowledge the GOI's desire to receive some proportion of EV in cash. It is logical. We would like, however, to point out that at the end of the day what matters most is the long-term success of Air India which will be a significant contributor (directly and indirectly) to GDP and also to the Indian exchequer," the potential bidder said.
In order to create long-term success, the successful bidder will need to invest cash in upgrading the owned and leased fleet. "An airline is a commodity business wherein any operator must be the most efficient and have the lowest cost per seat kilometre. This requires having the latest generation of aircraft that are suitable for the task," the potential bidder pointed out.
While listing the other expenses that the new owner of Air India will have to undertake, the interested bidder said, "There are large amounts of cash required to bring into service aircraft that are not in service for any reason. Return obligations to lessors will need to be paid. Large amounts of cash is required to meet health, gratuity and other employee benefits. Any restructuring will require large amounts of cash including any VRS."
"Please keep this in mind in your deliberations. In particular, we recommend that the focus should be on the cash required by the ailing company in difficult times and not on taking any money out of the business," it said. In response to this query, the DIPAM said that there will be no change in the provisions of the Preliminary Information Memorandum (PIM).
Media reports have claimed that the government is considering reducing Air India's debt further in order to woo buyers. The debt of the national carrier stood at Rs 58,255 crore on March 31, 2019. Later in 2019, the government transferred Rs 29,464 crore of the debt from Air India to a government-owned special purpose vehicle called Air India Assets Holding Company Ltd (AIAHL). The COVID-19 pandemic has dealt a serious blow to the already battered airline. Civil Aviation Minister Hardeep Singh Puri had said in a written response submitted in the Lok Sabha during the Monsoon Session, "Air India has incurred a net loss of Rs 2,570 crore in the first quarter of 2020-21 as compared to a net loss of Rs 785 crore sustained in the corresponding period a year ago."
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