Is SARFAESI Act not Applicable to Air India?

The Economic Times recently published the following news: “Air India default to hurt Indian bank’s rating: Moody’s Investor Services.”  70% of Air India’s total borrowings have been arranged by Indian lenders which include State Bank of India, Central Bank of India, Punjab National Bank, Bank of Baroda, Bank of India, IDBI Bank, and Oriental Bank.  Moody’s Investor Services said, “Recurring defaults by the airline imply that the government support may not be timely, which is credit negative for Indian banks.” Air India, the Government’s greatest “White Elephant” has been struggling for sometime and it is surviving because of Government of India charity. It has been rescued from time to time by infusion of funds by government and recently also Air India received an amount of Rs.1200 crore from the government.

The accumulated losses of Air India are around Rs.13000 crore as on March 31, 2010 and the borrowings are as high as Rs.46000 crore. The government supported Air India when it was about to default during July by inducting fresh capital. Moody’s statement further states,” Also, the support was delayed and inadequate in our view as the government allowed the airline to delay paying employees salaries and bank interest. This poses concerns and raises doubts over its willingness to provide timely support to sovereign-owned PSU enterprises.” The gravity of the situation can be judged by what the reports of Moody state,” If the company were to be classified as NPA, it would be significant blow to our rated banks as they have lent up to 15% of their core tier-1 capital to AI”

What is the state of affair of Air India? Reuters report, “Air India, a relic of state ownership threatened by losses, bloated costs and more nimble rivals, needs to secure a massive debt and operational overhaul if it is to survive in a market growing at 20 percent a year.”  Under the condition prevailing now, AI not even paid the salaries for its staff since June and even cancelled handful of flights for one day due to non payment of fuel bills. The Reuters report further says, “Air India and 26 banks are in talks to restructure $4 billion of working capital debt in a deal that would force lenders including State Bank of India to accept equity in the carrier and cut lending rates to about 8 percent from 11-13 percent, saving it $133 million in interest costs.” The bankers do not have any other choice. But can they not invoke SARFAESI ACT? They dare not. AI is not an ordinary borrower. It is a government of India enterprise. Bankers cannot declare it as NPA. But they will have to accede to what ever the Government says. Even if the banks agree for a restructuring, Air India will not come out of its hibernated state. Chief Executive for the Indian subcontinent and Middle East at the Center for Asia Pacific Aviation (CAPA) Mr. Kapil Kaul said, “Fundamentally, Air India has reached a dead end,” and “From a business case standpoint it should have ceased to operate a few years back had it been a private company.”  In spite of its present turmoil and various adverse and incriminating findings of CAG report Manmohan Singh Government is pushing for rehabilitation without any concrete plans for its future turnaround and present aviation minister has said recently that a restructuring plan has been approved by the bankers and would head to the cabinet in coming weeks though the bankers have not signed off on it. But government will have to justify throwing good money for a bad preposition knowing fully well its impact. Even if the government ropes in fresh investors, full privatization for Air India is not possible considering political constraints.  In this connection Hikmat Mahawat Khan, a Netherlands-based consultant at the Center of Excellence Aviation of Capgemini Consulting said, “It is almost unavoidable to privities Air India or at least rope in private enterprise even if the government remains a stake holder; its current form is not sustainable in future.”

The pertinent question is whether the banks will show such an attitude with regard to other private enterprises particularly belonging to SMEs if they face such difficult situation. Will government come to the aid of such enterprises to come out of their predicaments? Whose money, the government is going to throw to back up a well known loosing venture? It is obvious that it is the tax payers’ money that is going to go down the drains.

In a memo to staff, Air India’s Chairman apologized for the delay in salary payments. He wrote, “You are well aware that Air India is passing through a very challenging and critical phase. Increasing debts, mushrooming interest burden and increasing fuel costs are financially crippling the company,” Is it not applicable to all those enterprises against whom the banks have invoked SARFAESI Act? Are these enterprises also not contributing to GDP of the nation? Are they not also creating employment potential? Are they not contributing to national development and progress? Then why is the discrimination?

In my opinion, the borrowers who are now facing the effect of SARFAESI Act should quote the case of Air India in their pleadings in DRT for getting relief and help to mitigate their hardships and for an economic revival and turnaround.   

Clarification:

SARFAESI ACT states under miscellaneous head (Provision of this Act not to apply in certain cases”) in Section 31(c), “creation of security interest in any aircraft as defined in clause(1) of section 2 of the Aircraft Act, 1934 (24 of 1934)” As such the act cannot be applied to Securitisation of Aircraft. Still I wrote the article just to emphasis the fact that Government was trying to save AIR INDIA being the national carrier and the consequences of any action taken because of default would be far reaching. Further, as per RBI directives among other things, the banks will have to go in for repeated rehabilitation to save AIR INDIA, if necessary, by inducting more funds. My point is that the same care and concern shown by banks and Government of India to AIR INDIA in spite of all the adverse features and indictment in the CAG report, should be extended to the other industries also and banks may resort to invoke SARFAESI ACT only after exhausting all the other means including repeated rehabilitation as per RBI directives to recover the debt. The borrowers face enormous problems because of the stifling attitude of banks and some of Presiding Officers at DRT favoring the banks so blatantly in spite of the fact that the default has occurred due to circumstances beyond the control of the borrowers and banks’ violation of various RBI directives. I hope that I have clarified my points.

T.R.Radhakrishnan,

Banking & Management Consultant,

Facilitator: DRT & SARFAESI CASES,

H.R.Trainer; Corporates, Colleges & Schools,

17, Morya Gardens, Kanadia Road,

Behind Karnataka Vidya Niketan,

Indore. 452016.

Madhya Pradesh

Email: trrk1941@gmail.com; radhakrishnan1941@gmail.com

(The author can be contacted through his e-mail)