India's long-planned airline privatisation's are in serious trouble after the government said it would disqualify both bidders for Indian Airlines and one of the two for Air India.

Partial privatisation's of the carriers have been ongoing for some time and are seen as key tests of the government's resolve to give up control of state-owned assets.

Early in July, disinvestment minister Arun Shourie said the country's Cabinet had "prima facie" disqualified the UK-based billionaire Hinduja brothers from the running for both airlines over allegations relating to an arms deal. Local group Videocon International was also disqualified from the running for Indian Airlines over alleged share rigging.

Both parties deny any wrongdoing, but controversial new privatisation rules mean the government can disallow bids from companies that merely face allegations of impropriety. The disqualification of the two groups has left Indian Airlines with no interested parties and the government says it is reassessing plans to unload 51% of the carrier.

The Hindujas' disqualification from the Air India race has left just one interested party - a consortium which includes the local Tata Group and Singapore Airlines (SIA). Shourie insists the Air India sell-off plans will proceed, but only if the consortium's financial bid, which is expected to be presented soon, is higher than a reserve price.

Air India's partial privatisation would give a strategic partner 40% of the carrier, of which 26% could go to a foreign component. Domestic institutions and airline staff are to each be offered 10%, leaving 40% with the state.

For Indian Airlines a 26% stake was to have been offered to a local strategic investor and another 25% to employees, the public and financial institutions, leaving the government with 49%.

The disqualification of the Hinduja group came soon after the Cabinet Committee on Disinvestment approved a draft shareholders' agreement detailing strict conditions for the future make-up of the airline's board and the obligations of shareholders. The posts of chairman, managing director and two-thirds of the carrier's directors must be Indian nationals. The document also specifies that the new owners cannot reduce the size of the carrier's bloated workforce of more than 17,000 for at least one year, after which attractive voluntary retirement packages must be offered. Major shareholders will also be barred from selling to competing airlines or any person deemed a security risk.

It is also thought that the shareholders' agreement includes a guarantee that Air India will retain all international traffic rights for at least seven years and have first right of refusal on newly available international services.

Source: Airline Business