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Introduction:
CCEA empowered Air India Specific Alternative Mechanism has approved the highest price bid of Talace Pvt Ltd, a wholly owned subsidiary of Tata Sons Pvt. Ltd for sale of 100% equity shareholding of Government of India in Air India along with equity shareholding of Air India in AIXL and AISATS. Tata Son’s bid quoted an enterprise value of Rs 18,000 which includes the debt of Rs 15,300 crore that it will take over and the Rs 2,700 crore cash that will go to the government of India.
About Disinvestment:
- Disinvestment, or divestment, refers to the act of a business or government selling or liquidating an asset or subsidiary or the process of dilution of a government’s stake in a PSU (Public Sector Undertaking).
- The concept of disinvestment follows the dictum: The government has no business to be in business.
- Thus, the government continues to disinvest in sectors where private companies are already the dominant players
Rationale behind Air India’s divestment:
- Financing economic recovery: There is a pressure on the government to raise resources to support the economic recovery and meet expectations of higher outlays for healthcare.
- The increase in public spending in the upcoming Budget will have to be financed to a large extent by garnering disinvestment proceeds and monetising assets.
- Minimum government Maximum governance: To eliminate the need for the government’s involvement in non-strategic areas.
- Government must not to business, is the rationale behind the divestment.
- Government presence distorts competitive dynamics for private players.
- Raising efficiency: To diversify the ownership of PSU for enhancing efficiency of individual enterprise. Eg Hindustan Zinc is the world’s second-largest zinc-lead miner and one of the top 10 silver producers. It benefitted from the privatisation.
- Better economic potential under private players: Economic potential of such entities may be better discovered in the hands of the strategic investors due to various factors,g. infusion of capital, technology up-gradation and efficient management practices
- Better utilization of taxpayer money: Loss making PSU’s results in consumers and taxpayers bearing the brunt of inefficient PSU operations. Instead, government can use the same resources into areas that directly benefit people.
Nationalisation of Air India:
- Air India owes its birth to the Tata Group in 1932. In 1947, as India gained Independence, the government bought 49 per cent stake in the company.
- In 1953, in what was a termed as a cruel blow to J R D Tata since he had so carefully nurtured Air India, the government nationalised the company.
- In recognition of his expertise of the aviation sector and close association with the airline, J R D Tata was appointed Chairperson of Air India.
- However, in yet another blow to the ageing Tata patriarch, in 1977, the-then government dropped him from the boards of both Air India and Indian Airlines.
- Despite the shake-up, the nationalised Air India was professionally run and soon established itself as a leading carrier in the field of aviation. It was in 2001 that the-then government decided against state participation in civil aviation.
- It tried to reduce the government’s stake by 40 per cent in the airline. However, for varying reasons that attempt could not be successfully executed.
- In 2007, in what was ostensibly mooted as an attempt to reduce the losses of the domestic carrier, Indian Airlines, it was merged with Air India.
- That merger was most unprofessionally executed, with both airlines in the red. The merged entity remained constantly in financial difficulty and had to be supported from the national exchequer as it continuously made losses.
- Since 2009-10, the government has spent over ₹I trillion (S$20.34 billion) to bridge the losses. As of August 2021, Air India’s debt was ₹61,562 crore (about S$13.56 billion).
- The next attempt to divest the entity was made in 2018. Under false notions of continuing its hold in the organisation, the government’s proposal was to divest only 76 per cent of its stake. Naturally, there was no buyer since bidders were wary of the government continuing to have its finger in the pie.
- It was finally in 2020 that government took a pragmatic and flexible approach in deciding to divest the entity fully. The government agreed to retain part of the debt, since in all previous attempts prospective bidders were discouraged by the huge debt burden that the airline had built up.
Significance of this sale:
- From the government’s perspective, there are two ways to look at it.
- One, it underscores commitment to reducing the government’s role in the economy; the govt claim to have saved taxpayers from paying for daily losses of AI.
- However, purely in terms of money, the deal does not result in as big a step towards achieving the government’ s disinvestment target of the current year.
- Moreover, of the total AI debt of Rs 61,562 crore, the Tatas will take care of Rs 15,300 crore and will pay an additional Rs 2,700 crore in cash to the government.
- That leaves Rs 43,562 crore of debt. The assets left with the government, such as buildings, etc., will likely generate Rs 14,718 crore. But that will still leave the government with a debt of Rs 28,844 crore to pay back.
- So, it can be argued that if the government had run AI well, it could have made profits and paid off the debts — instead of selling the airline (that can make profits) and still be left with a lot of debt.
- From the Tatas’ perspective, apart from the emotional aspect of regaining control of an airline that they started, AI’s acquisition is a long-term bet.
- The Tatas are expected to invest far more than what they have paid the government if this bet is to work for them.
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