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From cloud nine to caretaker's care: Indian Airlines finances simulate a turbulent flight

Paranjoy Guha Thakurta in New Delhi

While the President of India, K R Narayanan, has opposed the decision of the Union government to restructure the finances of Indian Airlines, ministers and powerful bureaucrats are trying to convince the Rashtrapati Bhavan to change its position on the issue.

Government officials want to recast the equity capital of the public sector as the domestic aviation corporation cannot wait for three months till a new government is in place. But the mandarins in the President's secretariat are reportedly equally adamant that there is no great urgency to push through the proposal to infuse fresh capital into IA.

Those opposed to the revamp proposal are urging the President to stick to his position on the ground that the caretaker government headed by Prime Minister Atal Behari Vajpayee should not be allowed to go ahead with a scheme which would significantly affect the future of IA.

The problems being faced by IA are not new. It was in May 1993 when the then civil aviation minister Ghulam Nabi Azad announced a five-year moratorium on repayment of dues of Vayudoot which ended in May 1998.

Vayudoot's equity capital used to be held by IA and Air-India in equal proportions of 50 per cent. Then, Air-India's share was picked up by IA resulting in Vayudoot becoming a 100 per cent subsidiary of the latter.

The problems which arose out of the so-called merger of Vayudoot and IA continue to haunt the latter. Vayudoot's losses were estimated to be around Rs 2 billion but no proper audit has been done of its accounts.

In fact, it is said that some of the relevant documents on Vayudoot's finances cannot even be located. (And IA's accounts currently do not reflect the losses incurred by Vayudoot nor for that matter, does it reflect the finance of IA's other wholly-owned subsidiary, Alliance Air).

In 1997, during the United Front government, an official committee set up to revamp IA, headed by Vijay Kelkar (who was then the petroleum secretary), submitted its recommendations. These included an infusion of fresh equity capital by the government into Indian Airlines before "disinvesting" the corporation's shares to the general public. Many of these suggestions did not find favour with the ministry of finance, though they were generally acceptable to the ministry of civil aviation.

The first Budget of the Vajpayee government announced by finance minister Yashwant Sinha in June 1998 proposed that 51 per cent of shares of IA should be disinvested over a three-year period after an infusion of equity capital to the tune of Rs 1.25 billion by the Government of India. This move, however, did not come through.

The expenditure Budget for the current year 1999-2000 indicates that the amount of Rs 1.25 billion which was sanctioned in the previous year had not been spent. Curiously, Sinha's second Budget makes niggardly provision of an investment worth Rs 100,000 for IA!

On May 9, the Cabinet Committee on Economic Affairs approved an infusion of Rs 3.25 billion into IA -- Rs 2 billion more than the amount mentioned earlier to take into account the Vayudoot's losses. The Cabinet also announced a two-year extension of the moratorium on repayment of outstanding dues to the government.

The Cabinet note prepared by bureaucrats reportedly stated that "it is expected" that IA would be able to raise Rs 7.60 billion by "disinvesting" its share in the market. This "disinvestment" scheme presumes that either there would be buyers for IA shares among the general public or that a "strategic partner" would pick up a large chunk of IA shares.

In late May, after officials in the President's secretariat expressed the Rashtrapati Bhavan's disapproval of the disinvestment scheme by writing to the Cabinet Secretariat, the latter wrote back stating that the government would nevertheless like to infuse Rs 1.25 billion as fresh equity capital into IA.

Cabinet Secretary Prabhat Kumar reportedly argued against the objections raised by the Rashtrapati Bhavan, namely that there was no urgency to infuse fresh equity capital at this juncture and that this amount had not in any case been sanctioned in the Union Budget approved by Parliament.

The real issues, aviation expert Joseph Thomas argues, are quite different. The fact is that IA has improved its finances in spite of competition from private airlines, he points out. IA's losses have come down steadily form Rs 2.65 billion in 1993-94 to Rs 1.89 billion the following year and Rs 1.10 billion the year after that (1995-96).

In 1996-97, IA's losses came down further to less than Rs 150 million. The following year, the corporation made a marginal profit. In 1998-99, Indian Airlines' annual accounts indicate a profit of Rs 450 million.

"I believe these profits are meagre considering IA's annual turnover of Rs 30 billion," says Thomas. Even the profits shown are notional since the accounts are riddled with qualifications made by government auditors (of the Comptroller and Auditor-General of India), he adds.

Thomas is of the view that an infusion of Rs 1.25 billion of fresh equity into IA would be like throwing good money after bad. "Vayudoot's losses have not yet been brought into IA's books and yet the corporation as well as the ministry are making a big noise about it. The fact is that Vayudoot's losses are being borne by its creditors who have not been paid for over six years now," he said.

He points out that IA would be able to garner resources only if it issues fresh shares and not by selling the government's shares in the market. Then comes the question of making IA's shares sufficiently attractive to the general investor or to a prospective strategic-partner. "The real book value of IA is either zero or negative," says Thomas.

"The accounts of Vayudoot have not been prepared. So how can these be audited? If this was a private company, its directors would have been in deep trouble, perhaps even in jail, for violating the law. Certain officials are indulging in a campaign of disinformation and it is not at all clear how IA would be able to raise a sum in excess of Rs 7.50 billion by selling its shares in the market," he claimed.

According to Thomas, the real reason why IA wants a fresh infusion of funds is that it wants to operate flights from Delhi and Bombay to destinations like Frankfurt, Geneva, Rome and Manchester, routes which have been vacated by Air-India. In order to operate these new flights, IA would need substantial funds to lease aircraft.

Despite the attempts being made by the caretaker government to revamp the finances of IA, it is clear that this will not happen in a hurry.

Kind courtesy: Sunday newsmagazine

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