The Cabinet also approved amendments to the Companies Act.
The Cabinet Committee on Economic Affairs (CCEA) has allowed non-resident Indians (NRIs) to own 100 percent stake in Air India.
The decision was announced after a Cabinet meeting on March 4 by Union Minister Prakash Javadekar.
NRIs were so far allowed to invest only 49 percent in Air India. The Cabinet did not tweak the foreign direct investment (FDI) limit in Air India, which is currently 49 percent through the government approval route.
The government plans to divest its entire stake in the national carrier and has set a March 17 deadline for receiving bids. This is the government's second attempt to privatise the airline, after the first one in 2018 failed.
Tata Sons and Adani Group are the frontrunners in the race to acquire Air India, according to media reports.The Cabinet also approved amendments to the Companies Act. Finance Minister Nirmala Sitharaman added that the Cabinet had suggested 72 changes to 65 sections of the Companies Act, with a priority on decriminalising the Act.