The lemon-plus problem in corporate rescues

Unhealthy cultural templates erode enterprise value, denting the feasibility of rescue

- M S SAHOO & CKG NAIR

The strategic divestment of Air India and its subsidiaries by the Government of India to the Tatas was technically a sale, but in essence, a rescue of a flailing airline. It was, however, a classic case of the "lemon-plus problem": Not only the information asymmetry typical of used products, but also the weight of entrenched cultural baggage.

What deterred investors in earlier attempts to sell Air India was not so much the financial liabilities or ownership restrictions, but the perceived difficulty of reforming an organisational culture shaped over nine decades under very different managements: The Tatas (1932-1953) and the Government of India (1953-2022).

For the Tatas, the eventual takeover was less a commercial decision than a moral reclamation, driven by legacy, national pride, and emotional commitment. This highlights the potential of cultural baggage to complicate, or even derail, corporate rescues, regardless of their financial or strategic rationale.

Companies undergoing rescue under the Insolvency and Bankruptcy Code, 2016 (IBC) are no different. Axiomatically, they are lemons. Many, like Air India, suffer from lemon-plus problems. The IBC seeks to rescue viable companies. In principle, a company is viable when it has a going concern surplus (GCS), that is, the excess of its fair value (FV) over its liquidation value (LV). It is the GCS that incentivizes the market to step in to rescue a distressed but viable entity.