The Naresh Chandra committee on civil aviation is likely to recommend that foreign airlines be allowed to buy up to 49 per cent in Air-India.
At present, foreign direct investment up to 40 per cent is allowed, but foreign airlines are barred from holding stakes in domestic ones.
According to sources in the committee, the concept of a national flag carrier will not be diluted post-privatisation because the government will continue to hold a 51 per cent stake in Air-India.
However, in domestic airlines, the committee is open to the idea of allowing foreign airlines to pick up only a 26 per cent stake, with the balance 23 per cent held by foreign institutional investors and others.
While Air-India is plagued with management problems and needs the expertise of foreign airlines, Indian Airlines' problems arise from uneconomical routes and high sales tax on aviation turbine fuel.
The committee is, however, opposed to a merger between Indian Airlines and Air-India as recommended by AT Kearney, the consultants appointed by the civil aviation ministry to prepare a business plan for the two carriers.
The sources said Air-India should have a distinct brand image to remain the national flag carrier.
"The fact that the airline flies cattle class to West Asia is not in sync with that of being the country's representative carrier to foreign destinations. This dichotomy has to be resolved," a source said.
"A merger between Indian Airlines and Air-India does not make sense, primarily because the two airlines have different problems. What is necessary is rationalisation and synergisation on international routes," the source said.
The five-member committee, which was set up in August this year, will meet in Mumbai on Thursday before finalising its interim recommendations by the end of the month.
The sources said the committee was opposed to investment by foreign airlines in airport infrastructure, primarily to avoid monopolisation of an airport by an airline.
The government recently shortlisted KPMG, ABN Amro and Ernst & Young as advisers for the privatisation of the Delhi and Mumbai airports.
The committee may also suggest doing away with the 15 per cent inland air travel tax on tickets. Instead, the committee found favour in imposing a service tax on air travel for all passengers originating from India.
The idea is to make the charges more rational, while ensuring that the government does not lose revenue.