Pre-Sale Structuring Of Assets Makes Sense


Asset stripping is not quite designed to improve the appeal of a company put on the block for sale to the highest bidder — unless the company being sold is a public sector enterprise. The government has done well to transfer yet more assets of Air India, plans to privatise which have been circling at low altitude for years without getting clearance to land. This would make the privatisation more likely this year itself.

The government has made its divestment targets more attractive by allowing their accumulated losses to be carried forward — meaning that the buyer’s tax liability would come down, to the extent its taxable profits are lowered by the losses carried forward. Why should removal of core assets such as land at Nariman Point or in New Delhi’s Connaught Circus increase the likelihood of Air India’s sale? Do would-be buyers of airlines have some special allergy to posh real estate? The problem is not with the buyer but with the seller.

No babu wants to sign off on a deal that a Comptroller and Auditor General (CAG) or a pesky public interest litigant excavating the transaction some years hence could claim caused loss to the exchequer. Property valuations can be arbitrary at the best of times. It can be all the more tenuous when done as part of a complex transaction involving a variety of assets. No civil servant wants to go to jail by agreeing to a valuation of assets that runs a high risk of being shown to be undervalued.

Therefore, removing such assets that are peripheral to the main operations of the public enterprise being privatised from that entity makes it easy for the babus in charge to carry out the sale. It also kicks the can of unlocking the value of these assets transferred to a holding company down the road. For the buyer too, it lowers the chances of, and expenses on, future litigation. It makes sense to exempt Air India from having to collect tax on the sale of its assets to its buyer. In fact, mandating sellers to collect 0.1% of the sale value at source smacks of pre-electronic information scarcity

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