Why Jet Airways is being sold for Rs 1

Debt-ravaged Jet Airways India, the country's biggest full-service airline, is selling a majority stake for Rs 1 a little more than 1 US cent. It’s part of a bailout plan by its state- owned lenders that will give the airline time to arrange fresh equity. The complicated arrangement is on track to be voted through on February 21, in what would represent the rescue of one of the country's most visible companies at a sensitive time, with general election just weeks away.

What is Jet Airways?
It’s consistently been one of India’s top three airlines in the past decade. Jet Airways was founded by ticketing agent-turned-entrepreneur Naresh Goyal after India ended a state monopoly on aviation in the early 1990s. It’s now 24 per cent owned by Abu Dhabi’s Etihad Airways PJSC and controls 13.9 per cent of market, one of the fastest-growing in the world. Jet Airways also flies to international destinations including London and Singapore.

Why is it in trouble?
As a slew of budget carriers started flooding the market in the mid 2000s, offering no-frills, yet on-time flights, Jet Airways began dropping fares, some to below cost. On top of that, provincial taxes of as much as 30 percent on jet fuel added to its expenses. Jet Airways lost money in all but two of the past 11 years and has Rs 7,299 crore ($1 billion) of net debt. While it didn't separately disclose cash and cash equivalents as of December 31, Bloomberg calculations show the airline had about Rs 355 crore of cash at the end of last year. It defaulted on loans that were due by December 31 and has delayed payments to staff and lessors.

What is the proposed deal?
A group of lenders led by State Bank of India has proposed taking a 50.1 percent stake for Rs 1 through the issuance of 114 million new shares, a manoeuvre that's allowed under a framework outlined by the RBI last year. The procedure, applicable for companies with a negative net worth, is called Bank-led provisional resolution plan, or BLPRP, and it needs to be approved by all lenders, a banking industry group, founder Goyal and the board of Etihad. The structure, however, is expected to be temporary, allowing the airline to raise equity from investors, which in turn would alter the shareholding pattern. Jet Airways, which requires some Rs 8,500 crore to get back on its feet, now needs to bridge that gap through fresh equity infusion, debt restructuring and asset disposals, such as selling aircraft and leasing them back. While the bank deal is nominally a conversion of debt into shares, debt levels will come down only by Rs 1 once the exercise is completed.

Who will invest fresh equity?
Jet Airways management has given scant detail, but said lenders will also participate in an equity issuance round beyond the already allotted 114 million shares. Jet Airways has held talks with Etihad and Tata, while Goyal has offered to pump in as much as Rs 700 crore, if he retains his 25 per cent stake. Etihad may invest about Rs 1,400 crore and retain a stake below 25 per cent, while India’s National Investment and Infrastructure Fund may bring in as much Rs 1,300 crore.

Why is it important to rescue a private firm?
Prime minister Narendra Modi faces an election within months, and the collapse of an airline with 23,000 jobs at stake would put a dent in his business-friendly image and fuel criticism that he's failed to deliver on promises about creating jobs.

–– Anurag Kotoky