Air India divestment: Profitability criteria doesn't apply to domestic airlines, says Jayant Sinha

The government has cleared the runway for Air India's divestment - the government has given its 'in-principle' nod to sell 76 percent stake in national carrier Air India. CNBC-TV18's Shereen Bhan caught up with MoS, Civil Aviation Jayant Sinha to discuss the nuances of the decision.

Below is the transcript of the interview.

Shereen:  Why would the government want to retain any stake at all in Air India? Why not 100 percent disinvestment? The government has decided to retain stake, you are only offloading 76 percent, what was the rationale behind that decision?

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A: One of the things we do want to be able to do is to participate in the value creation that will happen once Air India is with new owners who will of course take it to great heights and make it into a great global airline. There will be tremendous value creation.

In fact if you look at what has happened to Maruti, Maruti today has a market cap of Rs 2.7 lakh crore, it has become a very valuable company under private ownership. We think that Air India will also do exceedingly well.

We will in fact be absorbing some of the debt of Air India in the asset holding company that we are creating and because we want to pay down that debt and we want to be able to fulfil all the obligations that government has, we would like to be able to maintain a certain residual stake in Air India, so that we can participate in the value creation.

I would like to point out that we are giving full management control to the new owners. So, full management control will vest with the full owner, the government will participate so that we can be able to unlock some of the value that is in Air India.

There is another important point to note, which is that the ESOP that we will create, the stock ownership pool that we will create for employees will come out of the government's stake of 24 percent. So, government's stake will probably even fall below 20 percent once we create the ESOP pool for employees as well.

So, we want to really make sure that the value creation is fully shared by employees and of course by the people of India as Air India progresses and does much better going forward.

Shereen: You talked about value creation but you also talked about the other big concern and that is with respect to debt. Let me ask you for clarification because as per the memorandum, you basically say that liabilities - which is, current liabilities as well as net liabilities aggregating to a total of about Rs 33000 crore will remain with Air India and Air India Express (AIXL) and balance debt shall be allocated to Air India Asset Holding. So the bidder will have to take on Rs 33000 crore odd in terms of debt and how much would be the balance that would then move to Air India Asset Holding?

A: That is wrong, let me be crystal clear about it, there is Rs 24576 crore of interest bearing debt that will be transferred to the new Air India. If you look at our annual reports that we put out for fiscal year 2016-17, you will see that the total amount of interest bearing debt that we have right now is almost about Rs 50000 crore. So we will be transferring Rs 24576 crore of that to the new Air India. The remainder which is about Rs 25000 crore will stay with the asset holding company. The additional Rs 8800 crore of current liabilities that will go with the new Air India really represent net working capital, they are not interest bearing debt, but for the sake of accuracy we have said that interest bearing debt plus current liabilities will amount to Rs 33392 crore. There is interest bearing debt of Rs 24576 crore that will go with the new Air India, the rest will be current liabilities.

Shereen: I also wanted to ask about some of the eligibility criteria that you have listed as per the memorandum, you say companies with net worth of Rs 5000 crore will be allowed to bid for government's stake in Air India, you also say that the company will need to be PAT positive in at least 3 of the preceding 5 years from the expression of interest deadline. Hypothetically, because you are also allowing consortium's for the Air India disinvestment, so will every party have to comply with this? For example Vistara would not comply with the profitability criteria. So will that then be disqualified or will it still be eligible as part of a consortium?

A: Profitability requirement does not apply to domestic airlines, it applies to non-domestic airlines. So the 3 out of 5 years does not apply to domestic airlines. We have a large number of domestic airlines that have low net worth or negative net worth, if you have negative net worth, we will make it zero and we have restricted their ownership of the consortium to 51 percent. Because they have negative net worth their contribution to the net worth of the consortium will of course be zero. Nonetheless, we will enable them to own upto 51 percent of the consortium. In aggregate the consortium will have to have Rs 5000 crore in net worth. So, we made that also very clear. It is in aggregate that the consortium will have to have a net worth of Rs 5000 crore.

So, for instance if we have a domestic airline with 51 percent ownership of the consortium, because if they are contributing zero net worth then they can own upto 51 percent of the consortium, 49 percent of the consortium will have to come from their partners. That 49 percent will have to be able to bring in an aggregate of at least Rs 5000 crore in net worth.

All of these calculations in various different cases are spelt out very specifically in the information memorandum itself and so I would request you as well as all those who are interested in this to actually go through those cases and see exactly how the rules have to be followed to be able to put together a consortium or a bidder who has a net worth of Rs 5000 crore. All of that is crystal clear in the cases that we have provided.

More to follow....

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