Spare the taxpayer

Use the IBC process for Air India

The government’s failed attempt to privatise the airline it owns, Air India (AI), is already bearing bitter fruit. The airline is behind on its payments to several of its creditors. These include both banks that extended loans as well as corporate entities that leased aircraft, including top-of-the-line Dreamliners. Debts have been piling up for at least two months in both cases. The aircraft lessors have declared that an “event of default” has occurred, which may mean that they begin proceedings to take back the aircraft; this would leave AI with a giant hole in its schedule and place it in even more trouble. The banks’ actions will be even more closely watched. The Reserve Bank of India (RBI) has been quite firm on the subject of not concealing bad loans any further; if AI misses payments for three months, then the banks might be entitled to declare its account a non-performing asset.

Naturally, the question that could be asked in this respect is: What is the precise status of the government-owned airline, whose debt, many assume, has an implicit sovereign guarantee? In fact, in the last financial year (2017-18), the government committed to releasing Rs 18 billion to allow the airline to deal with its accumulated losses. But only Rs 6.5 billion of that amount was released. AI is reportedly assuring its creditors that more is on the way. However, there are good reasons for the government to, in fact, not release any more of the money. Indeed, there may be a silver lining to this entire matter. The banks, concerned about NPAs, might be able to subject the AI account to the process outlined by the new Insolvency and Bankruptcy Code, or IBC. If so, the privatisation of AI might move forward purely through the application of law. The principles of the IBC should be allowed to operate in this case just as in any other. The operational creditors, such as aircraft lessors, and financial creditors, such as banks, should move the AI case to the National Company Law Tribunal.

Indeed, this might allow the government to wash its hands of the privatisation process and claim that the natural course of law is being followed. The criteria that had been set for the privatisation of AI were unnecessarily stringent but perhaps that was a reflection of the political constraints on the government. There is, after all, less than a year to go for the general elections and it would have been concerned about the eventual price at which the airline would have been sold as well as the terms of the sale. If it appears that they favoured a buyer, then it might have had significant electoral costs for the ruling party. If AI is subjected to the IBC process, however, the committee of creditors, mandated by the IBC process, could take the decisions that the government, as primary owner, is unwilling to take. From the taxpayer’s point of view, this would be a victory. After all, each additional day that the airline is on the government’s books is another day that taxpayers are on the hook for its losses.