“Air India’s strategic divestment process was too complex, but taught many lessons for the future strategic divestment process,” said Tuhin Kanta Pandey, secretary of the Department of Investment and Public Asset Management ( DIPAM). Activity area caught up with Pandey to find out what’s next on the agenda now that Air India’s divestment process is nearing completion. Extracts:
What are the main lessons of the Air India divestment process?
The privatization happened after 19 years, and no one had institutional memory except the records of the previous period in terms of how it has been done so far. So we had a process, but we didn’t have a transaction. However, now we have a process and we have tried a transaction.
Also, the whole process involved a lot of interdepartmental work and some things needed to be streamlined. This means we delegate the work so the process doesn’t get stuck in too many layers. Layers are needed for decision making, but in the committee process there is learning for all departments – the complexity of the share purchase agreement and the rest. In the future, their confidence in other privatizations, clauses, legal problems, balance sheet problem, all this will become much clearer to all. It’s like a learning curve, which will come, and subsequent transactions will benefit.
And, the most important point is that this was one of the most complex cases and not all DIPAM officers had the experience to deal with such cases. Many agents were common and were also the ones who witnessed multiple transactions. So, they have learned a lot in this process and of course their comfort level increases and their learning is now integrated.
The first time is always difficult. This divestment was not only difficult from a process point of view, but also due to the complexity of the assets involved. The business itself is complex. It also has huge ties to the economy.
Then the intricacies of the two-way, the brand, the slots and how an airline works, that kind of learning has been pretty good – in a sense, managing a complex transaction brings more confidence.
Did the past lessons
do divestments help?
In some ways, the laws have changed, such as listing laws, disclosures, and SEBI laws. Then we have the new company law (2013). There are also legal changes. But overall, they did a great job as well, and several of those learnings, such as the assessment methodology, were helpful.
These methodologies are very common in investment banking, so some of the work they did was very helpful to us in the form of manuals or documents they had and the way they did it.
We learned from these transactions in terms of valuation methodology – it’s pretty much the same as the discounted cash flow method. Subsequently, a white paper was published, which also contains a lot of information. So this learning has been there. But one thing is that you are not only learning, but also doing it.
What is the next step in the DIPAM program?
In BEML, Shipping Corporation, Nilanchal Ispat, Pawan Hans and Central Electronics Limited the due diligence process is underway and tenders can now take place. At the same time, the balance sheet for the previous year and the audit by C&AG also take place because this information must be provided before the financial offer can be made. With BPCL, we are making progress on these, and concluding them as part of the exercise is our goal.
What is the development on the LIC IPO front?
Progress is good in the search for Indian Embedded Value (IEV). I would say it is a colossal job. This is about institutionalizing a new type of software because there is a certain thing that the existing software could not have done in terms of integrated value production. Many of them had to be brought into the new framework, otherwise the Appointed Actuary would not sign it.
LIC also had to appoint advisers to lead them to the conversion. There are over 25 crore policies. It requires multiple servers to perform data processing. Then there was the problem of consolidating the accounting because you have to go for registration. There we had to involve the Institute of Chartered Accountant and follow their advice.
LIC is a single entity, it is a Corporation. There were a lot of exemptions because it predated the Insurance Act, and then there was the government guarantee. It has all the intricacies of the Air India genre.
I would say a huge job has been done. We’ve been there for over a year, and we’re moving in the right direction, and we should be able to produce IEV and we are targeting the IPO in the last quarter of the current fiscal year.
Will the DRHP for LIC IPO be filed next month?
No, it will be tabled a little later. All the timelines have been worked out. It is as if one feeds the other. You can have several DRHP chapters ready and at the same time the waiting for ENI, which will be fed when ready. It is in preparation.
What is the progress of the privatization of the general public sector insurance company and two nationalized banks as announced in the budget?
The Department of Financial Services is investigating the matter. Legally, things are clearer for the general insurance company. So DFS must indicate, then we will go for Cabinet approval. For nationalized banks, a first amendment to the nationalization law is required.
What is the status of the strategic divestment of IDBI Bank?
The required amendment in the law has been made, which means that there is no problem in terms of licensing. Advisors have been appointed and they will soon engage with the RBI to structure the transaction. The RBI needs to clarify how much equity we can give up, what the downward path would be, and who might come in. These are critical questions that will form the expression of interest (EoI). Our preparation for EoI has started and our goal is to publish this by December.
How are things going in the monetization of assets and the SPV for the land bank?
There are two parts to asset monetization: primary and non-core. We are already proceeding to the kernel. Different departments are doing this and NITI Aayog has a plan that we call the National Monetization Pipeline.
Then we have the monetization of non-core assets, which involves land or surplus assets. There, priority is given to companies to carry out a strategic divestment. There you have to think about various options like developer model, outright sale, auction or lease. So, in the event of a strategic divestment, you have three situations.
In the case of unlisted companies, you must separate essential and non-essential assets and dispose of them accordingly. In the case of listed companies, we have to carry out a spin-off, giving shares to minority shareholders in equal proportion. Then we have closed cases, where the RSV is to be given and the land is to be disposed of. The registrar of the company will not cross out the name until the assets and liabilities are squared.
Thus, if the assets are not sold in the event of closure and usually when the staff are separated, there is no body to complete the disposal of the assets. They are also not very inclined to proceed with the asset sale because they are concerned that it will be closed. It means someone else has to do it. Now who is anyone?
Administrative ministries cannot do this. That’s why we’ve thought of a Special Purpose Vehicle (SPV) for those cases where someone will take over. They can even charge a fee to CPSE and then do it for them or the title can get back to them on the book value, which we have made easier through changing the stamp law and changing the earnings in capital.
Otherwise, today the NBCC is able to function as the land management agency of some CPSEs. Even the RLDA can do it, but a systematic approach to the whole is the SPV. The Cabinet Note is almost ready and once approved it will be in place.
We have the SOE Department with us, and we will hand over the monetization work to them.