Selling Air India: An insight story

Subhomoy Bhattacharjee

Prime Minister Narendra Modi’s May 2018 message about Air India to a key government official was precise: Sell the airline, pull back what you can’t sell but don’t sit on it. This was just weeks before the abortive bid to sell the state-owned carrier was about to reach its logical failure.

R N Choubey, civil aviation secretary had gone on record just days before the deadline for bids was to end, saying “We are seeing a lot of excitement about the sale. However, if the required amount is not met, we will decide whether the sale will take place or not.” He had covered both ends, but it was clear that the effort had produced no interest from any company to buy the airline with a record level of debt. In FY17, Air India’s accumulated losses stood at Rs 47,145.62 crore.

“Two things did happen within government circles after the no-show,” said the official. The PMO decided to take over the key decisions in the Air India disinvestment process and the civil aviation ministry was taken out of the loop.

The Prime Minister was now going to use some of his political capital to make the sale happen. As a demonstration of the new resolve, the Department of Investment and Public Asset Management (DIPAM) was asked to report on the Air India sale directly to the PMO.

By the summer of 2018, former finance minister Arun Jaitley was ill and his ministry was temporarily handed over to Piyush Goyal. The year before, the cabinet committee on economic affairs had set up an Air India-specific Alternative Mechanism (AM) of ministers to be headed by the finance minister. With Jaitley’s illness, this AM soon became rudderless. The Ministry of Civil Aviation had also become rudderless as minister Pusapati Ashok Gajapathi Raju resigned in March 2018 over the demand for a special status to Andhra Pradesh.

Staff unions turn silent

With no political backing for the bids, no company was going to take on the risk of riding Air India, despite Choubey’s brave words. The collapse of the effort, however, had a collateral benefit. The Air India employee unions, which had been stridently opposing any sales, were left without any political support. For the first time in decades, they realised the company could actually be closed down. The bottomline, politicians from all parties had always assured the unions, was that the airline would never be shut since the private sector was keen to own it. When no company bid, this was the end of this chimera. Air India had run out of options. Either the government had to finance the colossal loss or it had to be shut down.

The AM was now reconstituted with home minister Amit Shah at the helm. For the first time, the option of closing down the airline was also on the agenda of the group. But before anything could be done, the general elections became due and all work on Air India files just stopped. It began only after the second term of the Modi government began. Along with Shah, the AM now had new finance minister Nirmala Sitharaman and commerce minister Piyush Goyal. Since there was no cabinet minister for civil aviation, there was no representative from the ministry. “It took off the pressure, immediately,” said another official connected with the process.

The AM had to now again formally instruct DIPAM, Air India shall be privatised. The norm for disinvestment written by successive secretaries was that if an expression of interest got no response the proposal was to be dropped. The concerned ministry would assume responsibility to either close or keep the company as a going concern on government support. The ministers were advised not to send the file to their respective secretaries. They were to sign on the proposal cutting out objections that have often brought many disinvestments to a dead halt. It was found that the proposal for a 74 per cent stake in the Indian flag carrier was signed by the AM, without even a discussion. The civil aviation ministry officials had steered the proposal. 

The benefit of the new strategy was immediately evident. In June 2019, rookie Minister of State for Civil Aviation, Hardeep Singh Puri, told Parliament in a written reply that the conditions were still not right for the sale of Air India. His ministry was not in the circuit, yet the officials in the ministry had answered a DIPAM-related query. Within hours, DIPAM secretary Atanu Chakraborty issued a Tweet saying, “Govt remains committed to the strategic disinvestment of AI and its subsidiaries.” Soon thereafter Puri’s ministry also issued a statement “…As per the recommendations of the AM, the government will now go ahead with the process of disinvestment of the company.” His tweet added that disinvestment in one of Air India’s subsidiary AIATSL was already “underway with its Expression of Interest published on 12.2.2019”.

The almost identical questions “whether the Government intends to disinvest Air India and its subsidiaries and if so, the details thereof and the reasons therefor” (sic) had come on the same day from four members, two from BJP and two from the Congress including its chief whip in the house Ravneet Singh Bittu. Instead of clubbing them together, as ministries usually do, they offered to answer those separately as unstarred questions. It resulted in less checking of the answers—usually ministers are orally briefed on starred questions but leave the un-starred ones to the officers. BJP’s senior members swung into action to figure out how the damage was done. Questions about Air India disinvestment would still pop up regularly in future, but would elicit a standard answer. 

Right after the Prime Minister’s intervention in 2018, DIPAM had begun an unusual process. It had to piece together the company’s finances in earnest. Generations of joint secretaries of civil aviation had used to their advantage the twin offices of the company at Mumbai and Delhi to fudge data. The disinvestment department had to take over the piles of files of the company from the civil aviation ministry and start piecing those together. This was a task no transaction adviser was going to take on. “We spent the better part of 2018 just getting to grips with the numbers”, said an official. Air India, for instance, had 110 aircrafts against an order of 100. For the generosity, the seller had padded up the rates for maintenance of the aircrafts. There were similar other red herrings strewn around in the company records.

Only after that process began to unravel the state of the company, did Chakraborty feel confident to ask the AM for permission to hold roadshows in 2019 to generate interest among the investors. If there was going to be a consortium bidding for the airlines, each member needed to know how deep in red ink the company was. The data room had to be constructed and finally decisions could be taken, as Modi had advised about which assets to hold back.

The briefings to the AM became more detailed. Chakraborty had meanwhile moved on as secretary, department of economic affairs. Tuhin Kanta Pandey took over as DIPAM secretary in October 2019. But not before another drama. Anil Kumar Khachi was brought in from Himachal Pradesh to take this story forward. But within 90 days, Khachi opted to go back to his state to become the chief secretary, throwing power equations in the state into a turmoil. Air India was going to prove a tough act. Tuhin Kanta Pandey was now brought from Odisha to take over the reins. Note, both Khachi and Pandey were not working at any central government run departments before coming to DIPAM. There were obvious reasons.

With Chakraborty and Pandey as finance and DIPAM secretaries, the critical core group of secretaries on disinvestment (CGD) now became more cohesive. These two were now calling the shots in the group, confidence among the investors grew and so results began to flow.

Both Shah and Goyal asked detailed questions at the AM meetings. “Unlike other disinvestments, the sale of Air India was not going to be a friendly match among the PSUs”, said one of the officials. Yet four companies including the Tata Group and surprisingly Avalon held discussions with DIPAM as preparatory to putting in bids. But then Covid struck. 

Reserve Price

There is a curious process in how the reserve price is set and the bids are opened. The DIPAM officials work with the transaction adviser to set a reserve price for the company. The transaction adviser makes a presentation to the CGD about their rationale for arriving at the reserve price. It is delivered in a sealed cover to the CGD which holds its meeting in the cabinet secretary’s office. 

The process is so timed that the same day when the reserve price is delivered to the cabinet secretariat in the Rashtrapati Bhawan complex, the disinvestment bids from the companies are also submitted. The reserve price is delivered in a sealed cover to the CGD. In this case the number was Rs 12,906 crore. Then two members of the CGD, an official from DIPAM and the administrative committee walk down two floors to where another team, the bid opening committee sit ready with the unopened envelopes of the bids. This committee includes the joint secretaries of the respective ministries and the representatives of the bidders. The bids were opened and Tata Sons Pvt. Ltd, through its wholly owned unit Talace Pvt. Ltd was found to have submitted the winning bid of ₹18,000 crore as the enterprise value of Air India. 

Why is the CGD ensconced in the cabinet secretariat instead of at DIPAM? There is simply no time to cart a car load of secretaries on the same day between offices to complete the file work on the reserve price and the opened bids, explained an official. They have to meet on the same day twice. The secrecy between the two floors ensures that the bidder does not have access to the reserve price and therefore an opportunity to game the system.

All of these seemed mighty difficult in 2020 during Covid. Collecting the officers in such a confined place seemed impossible. The Tatas also seemed to have reconciled to a further delay beyond 2021. But then again, the Prime Minister intervened.

Early this year, home minister Amit Shah said the coal sector would play a “very important role” in achieving the target of a five trillion dollar economy by 2022. Both of these targets seem far and away now.

A short version of this article first appeared on Business Standard: How they finally sold Air India: An insight story.

About the Author

Subhomoy Bhattacharjee

Subhomoy Bhattacharjee is a Consulting Editor at Business Standard.