More than three years after it drew a blank in getting bids for Air India, the government on Friday (October 8) announced the sale of the national carrier to the Tata Group at an enterprise value of Rs 18,000 crore.
The package price subsumes the brands and the slots of Air India as well as the low-cost subsidiary Air India Express and a 50 per cent stake in ground handling firm AISATS.
Of the bid amount of Rs 18,000 crore, the Tatas will pay Rs 2,700 crore in cash upfront while taking the remaining Rs 15,300 crore as debt, thus getting a lot of breathing time inasmuch as debts presumably represent the periodic installments of loan repayments. In addition, the buyer will also have to pay around Rs 9,185 crore on account of lease obligations of 42 leased aircraft, primarily the Boeing 787 Dreamliner aircrafts.
Air India's 12,000-odd employees have to be retained during the first year of operation and the Tatas will have to ensure business continuity.
The new owner can’t transfer the Air India logos—there are eight—at least for five years. After that, these can be transferred only to an Indian.
Predictably, on television channels, BJP detractors were seen hurling charges of sellout or crony capitalism thick and fast with their own valuations ranging wildly and egregiously from Rs 50,000 crore to Rs 3,00,000 crore, including for brands. Similar charges were made when the Vajpayee government sold 51 percent stake in BALCO to Sterling for Rs 550 crore. The burden of detractors’ song was the same---liquidation value of assets would be more than Rs 2,000 crore.
When a company is sold as a going concern, liquidation valuation (aggregate of piecemeal sale of assets to highest bidders) simply cannot be applied, because the buyer agrees to keep the business going and forswears asset stripping. Tatas have agreed to retain employees for at least one year but that by itself is no big deal to the employees. The government has cleverly passed on the buck of doing the hatchet job to Tatas. Be that as it may, but Tatas most surely would come up with some form of Voluntary Retirement Scheme, given the fact that keeping a bloated staff is simply unsustainable.
Much is made of Air India's brand value. The grounded Kingfisher Airlines pulled wool over the eyes of banks and took loans on the strength of its imputed brand value--when accounting norms clearly say that intangible assets cannot be propped up on the balance sheet unless bought for a price.
Air India has been steeped in losses and debts. Its bulk purchases of aircraft that condemned many languishing in hangars is the stuff of the derisive legend and a negative case study. Where then is the wistful scope for attributing brand value where none exists? The 2007 merger of Indian Airlines with it was the final nail in its coffins insofar as efficiency and profitability were concerned.
The fear of asset-stripping is real and not far-fetched when acquisition takes place. Unscrupulous buyers often takeover a business attracted by its prime assets, mainly real estate, and thus flatter to deceive by deigning to gloss over the piled-up losses. They soon reveal their true colors by selling the prime assets.
Section 72A of the Income Tax Act stipulates two preconditions, among others, for allowing the amalgamated company to set off the losses and unabsorbed depreciation of the amalgamating company:
That it holds continuously for a minimum period of five years from the date of amalgamation at least three-fourths of the book value of fixed assets of the amalgamating company acquired in a scheme of amalgamation; and
Continues with the business of the amalgamating company for a minimum period of five years from the date of amalgamation.
Air India has not been amalgamated or merged with Tata, but has only been bought and hence section 72A of the Income Tax Act has no applicability. Nevertheless, one hopes the government has taken care to ensure that the prime assets, namely the aircraft is not sold sooner or later when push comes to shove. Alternatively, one hopes it has written in a claw-back clause that ensures that should the business or assets be sold, the resultant profits would have to be substantially shared with the government of India, the proxy for taxpayers.
For the government and the taxpayers, the sale of Air India to Tatas is good riddance because piling up Rs 20 crore losses daily is foolhardy and masochistic. Besides, the Tata group has the reputation of being a serious player and will not mind the long haul, inevitable in capital intensive businesses.
(The author is a senior columnist and tweets @smurlidharan)
