Jet Airways is selling a majority stake to its lenders for Rs 1, under a complicated arrangement that is on track to be put on vote on February 21. A group of lenders led by State Bank of India has proposed taking a 50.1 per cent stake in India’s largest full-service carrier through the issuance of 114 million new shares — something that is allowed under a framework outlined by the Reserve Bank of India last year. The procedure, applicable for companies with a negative net worth, is called bank-led provisional resolution plan, and needs to be approved by all stakeholders including the promoter group and the board of Etihad, which owns 24 per cent of Jet. This is not a permanent solution, but only a holding mechanism pending a full equity infusion.
While it is, of course, good news that Jet may not go under — it is important that Jet survives in order to ensure decent competition in the civil aviation sector, which is increasingly being dominated by low-cost carrier IndiGo — there are other aspects of this proposed bailout that should give rise to concern. For one, it is planned that the National Investment and Infrastructure Fund (NIIF) might contribute some of the money required to address Jet’s Rs 8,500 crore debt. This is puzzling. The NIIF was set up to energise private investment in the infrastructure sector, and is a fund shared between private investors and the government. The purpose is to invest in greenfield infrastructure projects of the sort that are simply not getting built with private capital at the moment. However, using NIIF to bail out Jet is a very bad signal. It will convey to future private partners that the fund will be put at the disposal of the government even for politically convenient corporate rescues. It is hard to see why private investors will then trust the fund going forward. There are also real questions to be asked about whether banks should own a majority stake for any length of time in a company that operates in a profoundly risky sector such as aviation.
There is also the question of why, in this debt-to-equity deal involving a special rights issue, Jet founder and head Naresh Goyal should be permitted to retain a 20-21 per cent stake — a little less than half of his current 50 per cent. But the question is why Mr Goyal is being allowed to retain any stake at all after a bail-out plan. If lenders such as banks are taking a haircut, then basic principles of finance as well as proper incentives for promoters requires equity holders such as Mr Goyal to not get a share of the pie. Equity risk is greater than debt risk, and debt holders should be paid before equity holders get anything. It appears the deal being worked out is far too soft on Jet’s promoter — and is reminiscent of the banks’ forbearance for Kingfisher Airlines, when they poured money while allowing Vijay Mallya to retain a hold on the airline. In effect, banks are risking public money on a private airline yet again (SBI alone holds a quarter of Jet’s total debt). Such deals were to have stopped, so why are they still being offered to promoters?
via Soft on promoters, still | Business Standard Editorials