Etihad to have a say in selection of independent board members

FDI rules require 2/3rd of board members to be Indians, revamped board will have three members from Etihad, four members from Jet and seven independent members

The revamped Jet Airways board will have seven independent members who will be selected upon a consensus between two sides, said sources familiar  with the deal. This means Etihad Airways which is picking up 24 % stake for about Rs 2,060 crore in Naresh Goyal-owned airline will have a say in the selection of independent directors.

The government's foreign direct investment (FDI) rules in aviation require 2/3rd of board members to be Indian citizens and the revamped board will have three members from Etihad, four members from Jet and seven independent members.

Etihad is being regarded as an ordinary public shareholder under the agreement it signed with Jet Airways and such a classification does not require it to make an open offer. However the deal is facing hurdles with share holders and even Securities and Exchange Board of India and Foreign Investment Promotion Board of India raising concerns over "substantial rights'' being accorded to Etihad Airways. The FIPB has deferred granting sanction to the proposal which will allow

The two airlines reworked the original shareholder agreement last month tweaking various clauses to ensure that Etihad does not have joint control of the airline. This has been done to assuage regulators' concerns. One of the the changes is to the constitution of the nomination committee of the board which will make key board and management appointments. The nomination committee will include one person nominated each by Jet Airways and Etihad and three other board members will be chosen through consensus. In the earlier agreement Etihad had the right to nominate the three independent members on the committee.

"The nomination committee is essentially a sub committee  of the board. No such committee existed in Jet Airways before and it is not common in India,'' a source said. He added that Air Berlin, in which Etihad Airways holds a significant stake, has a nomination committee like set up and Etihad was keen to replicate it here too.

Jet Airways declined comment on the issue. "Since the transaction is being examined by the concerned regulatory authorities, and their consequent approvals are awaited, it would be inappropriate for Jet Airways to respond." a spokesperson said in an emailed response. It is learnt that the airline is yet to receive a formal communication from Sebi on whether more revisions are required to the agreement.

Etihad Airways said, "Etihad Airways’ equity investment in Jet Airways is now going through the required regulatory approval process."

Other  key changes in revised agreement ensure that Etihad will not have the unilateral right to terminate the commercial cooperation agreement and this right will now be held by both sides. Also, the agreement has been re-worked to ensure there is no ambiguity with respect to special rights and veto powers. A source said neither sides could now exercise veto power or casting vote in board matters or resolutions. "The changes were carried out to show that the control is not passed on to Etihad following the investment," he added.

Last month, Jet did not put up the proposal to amend the company's articles of association at its extraordinary general meeting here, where the sale of equity stake to Etihad was approved. Articles of association is a document which defines the responsibilities of a company's directors, the business to be undertaken, and the means by which the shareholders exert control over the board.

Etihad is investing Rs 2,060 crore in the airline and according to the original agreement, would get three seats on the board. Jet's shareholders, however, objected to certain clauses which gave Etihad a say in important matters such as appointments of vice-chairman and auditors.  Some shareholders said the articles of association were discriminatory to ordinary shareholders and inserted at Etihad's behest.

Timeline

<sup>April 24: Jet Airways and Etihad sign strategic alliance. Etihad agrees to pick up 24 percent stake in Jet Airways for about Rs 2060 crore

May 24: Jet Airways share holders approve sale of stake to Etihad. The airline defers resolutions to amend company's articles of association

May 27: The two airlines amend shareholder agreement to address shareholder and Sebi concerns on control and ownership

June 14: Foreign Investment Promotion Board defers approval to Jet-Etihad alliance</sup>