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Indian Airlines, Modern Food divestment decision draws plaudits

The Indian government has decided to privatise state-run domestic airline Indian Airlines and bread-maker Modern Food by divesting 51 per cent and 74 per cent of its stakes respectively.

On January 18, rediff.com broke the news that IA divestment is imminent

Twenty-six per cent of the IA equity will be divested in favour of a strategic partner which is not a foreign airlines. The other 25 per cent will be for financial institutions, employees and the public at large. The 49 per cent government equity would be divested in phases.

The joint venture or strategic partener may be given a free hand in the running of airlines, under the supervision of the board of directors. This would be clearly defined in our shareholding agreement, keeping the national security and possible emergency requirements in view. The shareholding agreement would be finalised and approved by the CCD before the financial bids were invited from bidders.

The CCD further decided that the divestment would be done within the framework of the domestic air transport policy with the provision that the bidder's company shall not have more than 40 per cent foreign equity. However, hundred per cent NRI or OCB company can bid for the takeover of Indian Airlines.
The equity from foreign airlines is not allowed directly or indirectly. The CCD has also decided that once this phase of divestment was over, the government may consider further divestment in future.

The process of divestment would continue to further improve efficiency and profitablity of Indian Airlines, it said.

The agreement of selling 26 per cent of IA equity to a partner would be subject to clearance from the CCD. An Inter-Ministerial Group would be set up to process the privatisation of Indian Airlines, which has been incurring losess for the past several years.

The IMG would comprise representatives from the Department of Divestment, civil aviation ministry, Department of Economic Affairs, Department of Public Enterprises and Indian Airlines. It would select a suitable global advisor to help in market and analysis, preparation of documents and advising about specific steps for divestment.

Seventy-four per cent stake of Modern Foods is being acquired by Hindustan Lever for Rs 1.05 billion. HLL will infuse a fresh equity of Rs 200 million in such a way that its shareholding remains restricted to 74 per cent equity. The government will hold 26 per cent in MFIL, after the selling process will be over.

The shareholding agreement provides five directors of HLL while the government will nominate two directors including chairman of the company. The agreement also provides selling of balance equity to HLL at fair market value, which shall not be less than the value per share being paid in the bid.

Modern Foods was incorporated in 1965 and have an equity of 130.1 million. The company has been earning profits and only incurred loss of Rs 68.7 million in 1998-99. In the preceeding two years, the company earned a profit of Rs 76.5 million and Rs 164.5 million respectively.

Other salient features of the shareholders agreement with HLL are: restriction on retrenchment of employees upto the first anniversary of the agreement without being given benefits equal to or better than the prevalent scheme of the government or as prescribed by applicable law.

Termination or dismissal of employees through the first anniversary of the agreement to be governed in accordance with the applicable staff regulation and law.

Breach of obligations relating to the employees to constitute an ''event of default'' inviting penal action in terms of buying strategic partner's share at a discount or sell all the government shares to strategic partner at a premium. this right is in addition to the remedies available under applicable law.

In case of default by either party, the aggrieved partner has the right to sell shares to the defaulting party at a premium or buy the defaulting party shares at a discount. This right is also in addition to the remedies available under applicable law. There is also a restriction on the strategic partner to sell its shares to any third party other than their affilate until the first anniversary.

The Confederation of Indian Industry today welcomed the decision to privatise IA and Modern Food Industries Limited, saying, ''It will send a very strong and healthy signal to both domestic and foreign investors.''

CII Economic Affairs Committee Chairman Satish Kaura said, ''The government will get high returns on its share of the equity as they have opted for outright privatisation. This will completely transfer the two public-owned firms and make them commercially sound companies.''

Describing it as a very courageous step, Kaura said the government must now communicate the exigencies behind the privatisation move to the workers and people at large.

He said, ''The foreign institutional investors will now see a whole new potential for business opening up what with the government share poised to fall below 51 per cent.''

The proposal to bring down government equity in Indian Airlines to 49 per cent was taken at a Cabinet Committee on Disinvestment presided by Prime Minster Atal Bihari Vajpayee.

Additional reportage: UNI

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