The government plans to divest its holdings in Indian Airlines and Air-India over the next two years in order to bankroll the fleet and route expansion plans of the two state-owned carriers.

"We need to finance the growth of the two carriers. How long can we depend on debt financing? We will have to dilute our stakes in the two airlines in the long term," Union Civil Aviation Minister Praful Patel told Business Standard on Wednesday on the sidelines of the Economic Editors Conference.

When asked about the time-frame for the divestment plan, Patel said, "First, we have to straighten the two carriers, then the government can divest its stake. It could take one or two years."

At the moment, the foreign investment guidelines for Indian Airlines and Air-India are not very clear.

Though the government has in the past said there is no proposal to privatise the two airlines, the foreign investment guidelines in civil aviation, which allow up to 49 per cent foreign direct investment in domestic carriers, do not specifically exclude Indian Airlines and Air-India.

Sources in the civil aviation ministry indicated that the move to divest government ownership in state-run carriers might require a change in the rules as the present policy was silent about it.

It is estimated that the two carriers will require funds to the tune of over Rs 25,000 crore (Rs 250 billion) to buy airplanes to boost their fleets. Indian Airlines' plan alone is worth Rs 9,475 crore (Rs 94.75 billion).

In comparison, the company's equity base is just Rs 105 crore (Rs 1.05 billion), though there is a proposal to raise it to Rs 430 crore (Rs 4.3 billion). Although the government has agreed to fund 10 per cent of the bill, taking on a debt like this could impose a very heavy interest burden on the company.

In case the government decides to offer a stake in Indian Airlines to a strategic investor, this will bring down the acquisition cost and keep the company's debt-equity ratio under check also.

It may also be recalled that the government had decided to divest up to 40 per cent in Air-India and had shortlisted the consortium of Tata Sons and Singapore Airlines as the potential buyer.

However, the process was called off in the last minute and policy was changed to exclude foreign airlines from investing in Indian carriers.

This move by the government will come in for stiff opposition from the Left parties. The Left had agreed to the government's proposal to raise the foreign investment cap in domestic airlines to 49 per cent from 40 per cent on the condition that the two state-run carriers will be kept outside the purview of the policy.

This move by the government comes close in the heels of it indicating a possibility to allow international airlines to invest in domestic carriers.

It's win-win for the government

• The government will dilute only a small stake
• PSU nature of the carriers will remain
• Funds will be ploughed back into the airlines
• Divestment modalities to be finalised soon
• Divestment may be based on NTPC model