A day after the great Air India flop show, it’s time to examine whether the government even has flexibility to make significant changes to the deal structure under which it wants to sell a majority stake in the airline.

Yesterday was the last day for bidders to place their bets, where the government was offering a 76% stake in Air India and Air India Express and a 50% stake in Air India SATS.

Not a single bid came in by the five o'clock deadline.

Whether the government will rework the disinvestment conditions and come back with a revised plan remains to be seen, though it has done exactly that for another aviation public sector undertaking, Pawan Hans Ltd.

Here too, unattractive bid conditions did not elicit a response in the first round.

But more to the point, what can the government change realistically to make a revised document for Air India sale more attractive to potential bidders?

One person close to developments told CNBCTV18.com that during the last month or so, senior government functionaries called repeated meetings with one particular potential bidder, asking what tweaks would this bidder want to become interested in placing a bid.

But, alongside the eagerness to make the proposition more attractive, the government also mentioned areas where concessions would be tough:

1) On the issue of employees, the government functionaries were clear that the terms such as offering a golden handshake as per Department of Investment and Public Asset Management (DIPAM) norms and the retention clause of one year were non-negotiable.

2) There was no possibility of raising the foreign direct investment (FDI) limit for Air India beyond 49%, though for the civil aviation sector as a whole 100% FDI was allowed, only investment by foreign airlines was capped at 49%.

3) The government also continued to insist that 24% stake and two board seats was another condition which would stay.

Since India-based airlines had already more or less indicated their unwillingness to look at Air India under these conditions, what did the government offer potential foreign investors?

No particular sop. Two different people close to developments said that 24 hours before the May 31 deadline, multiple parties were preparing to put in their bids, including a foreign airline and a well-known Indian conglomerate.

Why they developed cold feet at the last moment, no one knows for sure.

One of these people said at least one Gulf airline had earlier examined the Air India deal package before deciding that minority control (which is what it would have got under the deal structure) was a huge deterrent.

The second person said the frequent statements from people within the government or associated with the government, about the need to retain Air India in the hands of Indians were seen as a significant hurdle for foreign investment to come in.

The ruling party's 'Swadeshi' rant likely queered the pitch for any foreign investors, alongside the lopsided deal structure.

Remember, as per the deal structure, the government was offering only 76% equity and 51% had to necessarily remain in Indian hands after disinvestment. This meant a foreign airline or investor could at best hope to acquire 25% stake.

In mid-April, Rashtriya Swayamsevak Sangh (RSS) chief Mohan Bhagwat, had said at a BSE event, “If Air India has not been run properly, then give it to those who would be able to run it properly. He should be an Indian as you should not let your skies be controlled by someone else.”

He gave the example of Germany and Russia, saying that these countries don’t allow a majority shareholding in the company, capping the holding at 39-49%.

Bhagwat's comments were seen by some potential foreign investors as a warning.

And yesterday, Union Transport Minister Nitin Gadkari (who is one of the four ministers tasked with taking all decision on the divestment) told The Hindu, “Air India has a sentimental value for the country (Air India ke saath desh ki ek bhavna judi hui hai). That is why 51% stake will be with a company owned by an Indian citizen. Apart from that, we will keep 24% stake and a foreign player can buy the remaining share.”

With only minority stake on offer and the government continuing to have a proverbial right to interfere in the workings of the disinvested Air India, foreign investors were obviously driven away from the deal.

Why would a foreign airline or investor want a minority 25% stake, be beholden to an Indian investor as well as the government?

Another person said that the biggest deterrent for any investor - foreign or Indian - could well be the 24% government stake.

He said this would have opened up the possibility of a Comptroller Auditor and General of India (CAG), a Central Vigilance Commission (CVC) or a Central Bureau of Investigation (CBI) scrutiny into the disinvested airline and no investor wanted to take such a risk.

Remember, despite the two showpiece airports of Delhi and Mumbai being run by private parties under a concession agreement with the government, the CAG has been trying to audit their accounts.

Perhaps, the last nail in the coffin of any potential foreign investor was the witch hunt launched against Air Asia India's foreign promoters over the last week.

One analyst said that such retrospective action by the country's investigative agencies sent out a poor signal for fresh foreign investment in India's fractured and high cost airline business.

Another analyst said that any potential investor or the consortium making a bid for Air India would need to invest anywhere between Rs 5-6 billion in taking care of the airline's losses in the near term, restructuring it and investing further in technology etc.

Imagine, the appetite needed for spending this kind of money while continuing to hold a minority stake (in case of a foreign investor), being under scrutiny of investigative agencies and all the while also dealing with a hostile political environment!

Besides, why did the Narendra Modi government leave its biggest reform, the Air India sale, to the last part of its tenure?

Investors are wary, as the government has less than a year to go and in the developing political scenario, what’s the guarantee that this government can push the Air India sale through fully in the remaining period?

Air India was seen as a national airline, the Maharaja, which was earlier offered first right of refusal to slots, destinations and what not.

But today, when other Indian airlines have been flying overseas for years and Air India does not even have a fifth of domestic market share, clinging on to this concept and keeping foreign investors away will only mean another flop show.

If the government does indeed try once again to sell out Air India, not only it must heed advice on restructuring operations first, it must also perhaps shed obsession with 'swadeshi' to get foreign investors interested.

Sindhu Bhattacharya is a journalist based in Delhi who writes on a range of topics in business and economy

First Published:Jun 1, 2018 7:32 PM IST