The Indian government is to reduce its stake in Indian Airlines from 100 per cent to 49 per cent over the next three years as part of its strategy to turn the flag carrier around.

The government has decided to restructure the airline's capital base and reduce its equity stake to 49 per cent over the next three years, says finance minister Yashwanth Sinha.

The move will make Indian Airlines the first public sector company in which the Indian government holds less than a 50 per cent stake. The government has earmarked Rs1,250 million (US$30 million) in its budget to enlarge the carrier's capital base during 1998-99 as suggested by an expert group - the Kelkar Committee, set up by the government to recommend ways to turn the airline around.

The committee suggests increasing the airline's capital base from Rs1,050 million to Rs1,250 million, besides paying compensation of Rs2,000 million for the grounding of Indian Airlines' fleet of A320s following the Bangalore aircrash and a loan of Rs1,500 million to be repaid in three years.

The committee states the capital injection will give the government a return of around 48 per cent by 1999-2000 after the initial public offering.

If the capital injection fails to take place, Indian Airlines will not be able to renew its fleet and its market share will drop from 60 per cent at present to 11 per cent by 2002-3 and the airline will fold by 2005, predicts the committee. The government would then lose its investment of Rs40 billion.

Indian Airlines chairman P C Sen supports the increase in the airline's equity base, which will enable the airline to mobilise more funds from the capital market.

Source: Airline Business