Explained | Impact of Cairn Energy's lawsuit on Air India's divestment plans

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The central government’s ambitious plan to divest its stake in Air India may have hit another major hurdle, following British oil company Cairn Energy Plc filing a suit in a US court to seize the national carrier’s assets.

Cairn filed the suit on Friday. The move to sue Air India is to enforce a $1.2 billion arbitration award that the company won against India in a tax dispute case. The damages were awarded by an arbitration tribunal at The Hague in December last year. India’s appeal is pending hearing in the tribunal.

The central government said it would defend any attempt by Cairn Energy to take over Air India’s assets, and would contest Cairn’s move on grounds that it has challenged the arbitration award in The Hague.
What are the divestment challenges?

There are three major issues the government will face while trying to complete its divestment in Air India. They are the timeline for completion of stake sale, valuation of Air India and its assets, and a potential seizure of Air India’s assets from the government.

The new move by Cairn Energy could lead to the divestment process being pushed back even further, multiple lawyers told Moneycontrol.

“If a court recognises Air India as the alter ego of the Indian government, Cairn can seek attachment or seizure of its assets in the US such as airplanes, immovable assets and bank accounts to recover the amount it was awarded by the arbitration tribunal,” a Mumbai-based lawyer said.

However, officials from the Ministry of Civil Aviation said that Air India’s assets cannot be seized under the current circumstances as the government is contesting the arbitration award.

If the government loses its appeal against the arbitration order, the party winning the arbitration award can go for execution of the award.

In such a scenario, at the time of filing an execution application in the court, Cairn Energy can also file an application for attachment of properties of sub-sovereign entities, lawyers told Moneycontrol.

“This will give it possession of properties as security till the amount is paid,” the lawyer said.

How will asset seizure affect divestment?

A potential seizure of Air India’s assets will lower interest from potential buyers.

“If the divestment is delayed by a year or two, potential buyers would look at the organic route to increase their international operations,” a Delhi-based fundamental analyst said.

Tata Group, and SpiceJet chairman and managing director Ajay Singh, in his individual capacity, has been shortlisted to bid for the carrier, according to media reports.

Will the valuation of Air India and its assets change?

It was earlier expected to fetch around Rs 15,000 crore from the sale of Air India, its subsidiary Air India Express and Air India Sats Airport Services Private Ltd, by selling its 100 percent equity.

Any delay in the sale of Air India will also lower the leasing period of the airline’s planes.

“If the divestment process is delayed and the airline continues to make losses at its current rate, its debt level will continue to rise, making its less attractive to potential buyers,” an official from consultancy firm CAPA said.

In March, Minister of Civil Aviation Hardeep Singh Puri had said that while there have been several attempts by the government to privatise Air India, this time round, there is no choice but to privatise or close down the airline as it is running losses.

How many times have the bid deadline been extended?

The airline has run up a debt of around Rs 60,000 crore, Puri had said. In order to attract bids, the government had earlier transferred Rs 29,500 crore of Air India’s debt to a special purpose vehicle – Air India Asset Holding -- with real-estate assets.

On March 27, the minister had said that the government will wait for 64 days for the financial bids to come in. He added that there is no choice but to either "privatise or close" Air India.

Last year, the government had invited bids, and had extended the deadline for interested bidders four times due to the outbreak of COVID-19.

As per its last extension in 2020, the government had allowed time till October 30 and qualified interested bidders were allowed expected to be intimated by November 20.

Most aircraft are old ones

“Most of Air India’s 146 aircraft are older than 15 years. If the planes are seized even temporarily and not maintained properly, their valuations may be further impacted,” a Delhi-based market expert said.

Furthermore, the airline’s fleet may also fetch lower valuation due to the decline in prices of planes due to the outbreak of COVID-19.

According to Fitch Ratings, the market value of a 10-year-old wide-body aircraft like Boeing 777 has declined by 27 percent to around $30-35 million from $40-$45 million while that of a 10-year-old narrow-body like Boeing 737 and Airbus A320 aircraft has come down by 16 percent in the past year to around $18-21 million from $22-25 million.