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Lufthansa model for A-I, IA selloff likely

Mamata Singh & Gaurav Raghuvanshi

The government is considering the Lufthansa model for the divestment of Air-India and Indian Airlines.

The formula involves a two-stage divestment process in which the government first issues new shares to induct a strategic partner in the airline, uses the funds to turn the company around and then sells its stake to the public in the second round.

Such a process would not only ensure that the airlines get their much-needed fund infusion - which the government does not seem to be in a position to provide - but the government also gets a good price for its stake in the second round of divestment.

In a note on aviation sector divestment being circulated in the government, the divestment ministry has also suggested that the government relax the definition of non-resident Indians, who will be allowed to bid for the two state-owned carriers, and to allow foreign carriers to bid for Indian Airlines.

"In the first round, we should focus on induction of a strategic partner, and not the price. Any price realisation should be the focus in the next stage, by when the partner would have turned the airline around," a divestment ministry official said.

The model was used for the dilution of the government equity in Lufthansa, the German national carrier.

The German government had, in the first stage, issued fresh shares in Lufthansa, diluting its equity in the company from 100 per cent to 79.91 per cent in 1985. This was subsequently brought down to 54.93 per cent and there was no direct revenue accrual to the government in this process.

In the next stage of privatisation, in 1994, the German government further diluted its equity to 35.68 per cent by issuing new shares and selling its share of the equity.

Since the company was being steered efficiently by professional management and its financial health was good, the offer was oversubscribed and the state got a good price for its shares. Full privatisation was undertaken in 1996-97, when the government sold its remaining stake.

The matter of relaxing the definition of NRIs for the purpose of divestment is also being proposed.

Also, for Indian Airlines, the note states that foreign airlines should be allowed to pick up stake in the company. "Since the aviation sector is a high-risk, low-margin sector, the strategic partner should have prior experience in running an airline," the official said.

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