New Delhi has approved the establishment of a special purpose company that will take around half of Air India's debt and four subsidiaries that are set to be sold off.
Air India Asset Holdings was incorporated on 22 January, and will take Rs295 billion ($4.4 billion) of the carrier's unsecured debt, along with regional unit Alliance Air, Air India Engineering Services, groundhandling arm Air India Air Transport Services and Hotel Corporation of India.
The four subsidiaries will be sold off, with proceeds to be used to repay the debt held by Air India Asset.
The groundhandling arm in particular attracted attention in the run-up to the failed privatisation of Air India last year, receiving several expressions of interest from other companies to acquire the firm. Indian firms Bird Group and Livewel Aviation, as well as Turkish company Celebi Aviation Holding were among those keen on Air India Air Transport Services.
New Delhi says Air India Asset's board will include Air India's chairman and managing director Ashwani Lohani, a finance director from the airline, as well as the joint secretaries from various ministries.
The move is part of a revival plan for the struggling government-owned carrier, which has amassed major debts over a number of years and left it financially crippled.
New Delhi continues to provide financial support for Air India, with recent budget documents showing that it will receive Rs39.8 billion in financial assistance for the year to 31 March. However it has only been allocated Rs100,000 for the following financial year.