Air India’s “clearance sale” fees are outrageous; waterproofing clause required to anticipate the dismemberment of assets

More than three years after making a blank in obtaining offers for Air India, the government announced Friday, October 8 the sale of the national carrier to the Tata group at an enterprise value of Rs 18,000 crore.

The package price includes Air India brands and niches as well as low cost subsidiary Air India Express and a 50 percent stake in ground handling company AISATS.

Out of the bid amount of Rs 18,000 crore, the Tatas will pay Rs 2,700 crore in cash up front while taking the remaining Rs 15,300 as debt, thus getting plenty of time to breathe as debts likely represent periodic payments of loan repayments. In addition, the buyer will also have to pay approximately Rs 9,185 crore for the lease obligations of 42 leased aircraft, primarily the Boeing 787 Dreamliner aircraft.

Air India’s approximately 12,000 employees are to be retained in the first year of operation and the Tatas will have to ensure business continuity.
The new owner cannot transfer the Air India logos – there are eight of them – for at least five years. After that, these can only be transferred to an Indian.

As you might expect, on TV, BJP critics have been seen throwing thick and swift capitulation or crony capitalism accusations with their own estimates ranging wildly and blatantly from Rs 50,000 crore to Rs 3,000,000 crore including for brands. Similar charges were made when the Vajpayee government sold 51 percent of BALCO’s shares to Sterling for Rs 550 crore. The burden of song critics was the same — the liquidation value of the assets would exceed Rs 2,000 crore.

When a business is sold as a going concern, the liquidation valuation (total piecemeal sale of assets to highest bidders) simply cannot be applied, as the buyer commits to continue the activity and waives the dismemberment of assets. Tatas has agreed to keep his employees for at least a year, but that in itself is not a big deal for the employees. The government has cleverly shifted the responsibility of doing hatchet work to Tatas. Either way, Tatas would most certainly come up with some form of voluntary pension plan, given that keeping an overcrowded staff is simply unsustainable.

There is a lot of talk about the value of the Air India brand. Grounded Kingfisher Airlines took a look at banks and took out loans based on its imputed brand value – while accounting standards make it clear that intangibles cannot be recorded on the balance sheet only if they are purchased at a price.

Air India has suffered losses and debts. Its wholesale aircraft purchases that have doomed many languishing in hangars are the subject of a mocking legend and negative case study. So where is the melancholy significance of assigning brand value where there is none? The 2007 merger of Indian Airlines with it was the last nail in its coffins in terms of efficiency and profitability.

The fear of asset stripping is real and not exaggerated during acquisition. Unscrupulous buyers often take over a company attracted by its prime assets, mainly real estate, and thus flatter themselves by deceiving by deigning to conceal the accumulated losses. They soon reveal their true colors by selling the blue chip assets.

Section 72A of the Income Tax Act sets out, among other things, two preconditions for the amalgamated company to offset losses and unabsorbed depreciation of the amalgamating company:

1. That it holds continuously for a minimum period of five years from the date of the merger at least three quarters of the book value of the fixed assets of the merging company acquired in a merger plan; and

2. Continue the business of the amalgamating company for a minimum period of five years from the date of the amalgamation.

Air India has not been merged or merged with Tata, but has only been purchased and therefore Section 72A of the Income Tax Act is not applicable. Nonetheless, it is hoped that the government has taken care to ensure that the main asset, namely the aircraft, does not sell out sooner or later when the going. Alternatively, it is hoped that he wrote a clawback clause which ensures that in the event of a sale of the business or assets, the resulting profits should be substantially shared with the Indian government, the agent of the taxpayers.

For the government and the taxpayers, the sale of Air India to Tatas is good riddance, because accumulating Rs 20 crore of losses every day is reckless and masochistic. In addition, the Tata group has the reputation of being a serious player and does not fear the long term, which is inevitable in companies with high capital intensity.

(The author is a senior columnist and tweets @smurlidharan)

Posted on: Saturday October 09, 2021 13:12 IST