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Business Commentary/ Vir Sanghvi

Midnight massacre of a mid-term megaboard

The saga of the midnight dismissal of the Air-India and Indian Airlines joint board gets curiouser. The government -- in the form of the semi-articulate Minister for Civil Aviation, Ananth Kumar -- has offered two explanations.

The official version is that the chairman's term was coming to an end and that the board had to be reconstituted.

Off the record, however, his aides have been telling a different story. The board was sacked for insubordination, they say.

The minister and the government had declared that Air-India and Indian Airlines would be privatised individually. But the board announced that it was setting up a joint holding company for the two airlines preparatory to a merger. Therefore, it had to be sacked.

There are problems with both versions. The term of P C Sen, the joint chairman of Air-India and Indian Airlines, was to expire in February 1999. If the government wished to dispense with his services, it could easily have waited for two months and made new appointments. Why move so stealthily -- at midnight on a weekend -- and without warning?

The merger versus no-merger argument is a little more complicated. Nobody in his right mind disputes that in this day and age, airlines need a certain critical mass in terms of fleet size. The idea of merging Indian Airlines and Air-India (and then privatising the joint entity was given concrete shape six years ago).

It was pushed by Yogi Deveshwar, then chairman of Air-India, and backed by successive civil aviation ministers. P V Narasimha Rao even appointed Russi Mody as joint chairman of both airlines with the specific brief of merging the airlines.

During H D Deve Gowda's prime ministership, the government went a step further. Recognising that the journey towards privatisation required different skills than those available with the babus of Rajiv Gandhi Bhavan, it appointed a joint board for the two airlines consisting of professionals.

They included S H Khan of Industrial Development Bank of India, Deepak Parekh of Housing Development and Finance Corporation (now chairman of Infrastructure Development Finance Corporation), Ajit Kerkar, then of the Taj Group, R N Sharma of Hindustan Aeronautics Limited and Inder Sharma of Sita World Travels.

Last year, this board passed a resolution reaffirming its decisions to go in for a phased merger. It also appointed A F Ferguson, the management consultancy firm, to study the mechanics of this merger.

It is a truism in today's markets that a larger entity will command a better price -- the proposed STAR TV and Zee TV merger is one such instance aimed at the markets.

Ferguson recommended that if the government intended to sell off the two airlines separately within the year, then nothing more needed to be done. But if the process was going to take three years -- the time-frame announced by the finance minister -- then it made sense to combine the equity into a holding company, to implement economies of scale and to shore up the sagging fortunes of both airlines in a recessionary environment.

(As of now, Indian Airlines is marginally profitable while Air-India is in trouble.) If, three years later, a decision were taken to separate the two airlines and to sell them off separately, then this was still possible. Companies are demerged routinely prior to a floatation. And at least the airlines would be in a stronger economic position when they were hived off.

Ferguson made two full-scale presentations to the board in July. Its report was available to all directors and to everyone who read English at the ministry, including perhaps, Ananth Kumar. In December, when the board met to take a decision, it passed a resolution, which contained the words "an immediate merger would be a disaster" but saw the wisdom in placing the equity in a holding company to begin the process.

At this stage, the ministry had two options. It could accept the report and the board's decision. Or it could turn it down, saying that while successive civil aviation ministers and prime ministers were in favour of a merger, Kumar had decided that they were wrong and there would be no progress towards a merger, not even a holding company for the combined equity.

It may be that Kumar is a simple-minded lad from Karnataka with no experience of national politics or ministerial office, who is more at home on a bicycle than an aeroplane. But, for better or for worse, he is still a minister. And in that capacity, he represents you and me, the shareholders in the two national carriers. That gives him the right to disagree with Ferguson, with previous governments, with distinguished board members and with the management of the airlines.

In the event, Kumar not only disagreed with the board, he sacked it overnight. In the uproar that followed, he could find only one vaguely plausible justification for his action. A few months ago -- long after the merger process had commenced -- the Disinvestment Commission had recommended finding a foreign airline as a strategic partner for Air-India and selling 40 per cent of the equity to it. If 40 per cent of Air-India alone was to be sold, he asked, then how could both airlines be merged?

It was a nice try, but it didn't wash. One, a strategic partner would be much more interested in 40 per cent of the joint entity rather than just Air-India. Two, even if the government wanted to keep foreigners out of the domestic sector and hence reserve all 100 per cent of Indian Airlines for Indian investors, then the holding company could easily have been demerged. And three -- and most damning of all -- if the government was so keen on the Disinvestment Commission's recommendations, then why had it sat on them till now?

The ministry had made no attempt to find a strategic equity partner for Air-India (in any case, the airline was bitterly opposed to the plan) or to implement a single recommendation.

What you now have is a situation in which the government (though, of course, Kumar won't be around long enough for the finance minister's three-year time-table) wants to tell investors that they should buy shares in Indian Airlines -- which will be sold at around 10 per cent of the equity per tranche -- but that the airline will not be professionally managed. When such directors as Deepak Parekh take decisions that the minister disagrees with, they will be sacked and the new board packed with government servants and executives. Who in his right mind will want to buy shares in a corporation that is run in this manner?

Kumar's midnight of the long knives raises several questions. The first is about the A B Vajpayee government's attitude to economic ministries. Industry Minister Sikander Bakht had to threaten to resign to get the patents bill introduced. And the insurance bill, introduced with such fanfare, has now been consigned to the limbo of a parliamentary committee.

The Vajpayee camp can shrug off responsibility for the failures of Finance Minister Yashwant Sinha. He was never Vajpayee's choice. But it has no such excuse for Kumar's behaviour. This is the second time he has embarrassed the prime minister. First, he made such a pathetic job of defending the government's stand on the Tata airlines project that he lost Vajpayee valuable middle class support. Now, editorials in nearly every newspaper have condemned the government again. A strong prime minister would have sacked him or shifted him to a less high-profile portfolio. Instead, Kumar claims that Vajpayee blessed his midnight massacre.

The second question relates to divestment. The old argument for divestment was that if you appointed a professional board of directors, then it didn't matter if the government retained 40 per cent of the equity or even over 50 per cent. The government would be a passive stakeholder and investors would demand accountability from the professional board. But if a minister can sack the entire board of Indian Airlines Limited and Air-India Limited, it makes you wonder if this pattern of divestment can work.

And finally, there's the big question: why did Kumar, normally a low-profile simpleton who has spent the last eight months hiding out in Bangalore, take such a reckless step?

The conventional wisdom in New Delhi -- expressed on the floor of the House by no less a person than Manmohan Singh -- is that the ministry wanted a say in the purchase of several 50-seater aircraft for Indian Airlines. Kumar, it is said, backed the French firm, ATR, over the board's objections. As this was not a board that could be manipulated, he sacked it.

I find myself unwilling to accept this explanation. Kumar may well be -- as his actions demonstrate -- a not very bright person with a fragile ego, but I find it hard to think of him as a crook.

On the other hand, I'm still looking for a more convincing explanation for his behaviour.

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