Jet-Etihad deal cleared by FIPB with conditions after Etihad wings clipped

Deal will now go to Competition Commission of India, then CCEA which has jurisdiction to decide on FDI over Rs 1,200 crore

After much dillydallying and dilution of Etihad power, the beleaguered Jet Airways today moved closer to getting Rs 2,060 crore FDI from the Abu Dhabi-based airline company. The Foreign Investment Promotion Board (FIPB) cleared the deal with some riders.

 

The deal will now go to the Competition Commission of India (CCI) and then the Cabinet Committee on Economic Affairs (CCEA) which has the jurisdiction to take a call on FDI of over Rs 1,200 crore. After that, the deal will come to the ministry of civil aviation for approval under the Aircraft Rules. 

 

The conditions imposed by FIBP mandates that Jet has to have prior Government approval for making any changes in SHA. 

 

Also, any arbitration would have to be under Indian law and not English law as proposed in the revised SHA submitted by Jet-Etihad to FIPB.

 

The deal was earlier stuck over "effective control" to Abu Dhabi-based Etihad Airways which would be picking 24 per cent equity stake in Jet Airways. 

 

"All issues over effective control has been addressed... Jet board would have the final say," a senior civil aviation ministry said.

 

Earlier, Jet-Etihad filed revised SHA, reducing the number of Etihad directors on board to two from three. The revised SHA along with Commercial Cooperation Agreement (CCA) was submitted by Jet Airways on July 25, four days before the crucial meeting. 

 

In all Jet board will have 12 members with two from Etihad, four from Jet and six independent directors. Chairman Naresh Goyal will have a veto power, diluting powers from Etihad. Goyal holds 51 % stake in the airline and has four representatives on board. 

 

"Goyal with 51 percent shareholding has four members and Etihad with half the number of shares would have three members. So as concerns were being raised about control it was felt to reduce representation of Etihad to two members,'' a source said. Etihad, however, has the right to appoint the vice chairman on the board.

 

Earlier CCA between the two airlines prescribed that network and revenue management function will be shifted to Abu Dhabi. Now, it said principal place of business would be Mumbai. 

 

The CCI had sought an explanation from the two airlines on plans to set up hub in Abu Dhabi and the the agreement clause which requires Jet to exit from existing code-share arrangements with third parties on routes where Etihad or its affiliates operate. The CCI is seeking a clarification as the clauses can be perceived as anti consumer as it limits the choice for passengers.

 

A Jet Airways spokesperson refused to comment at this stage as other regulatory and government approvals are still required. 

 

Also, earlier CCA gave exclusive powers to the Nominations Committee of Jet-Etihad over Board's appointment or removal of independent directors and the chief executive officer. 

 

Sebi had objected to this saying that the Nominations Committee should not undermine the authority of the Board. The regulator is of the view that the powers of the Nominations Committee should be removed and the supremacy of the Board restored. 

 

Revised CCA says that all committees would be advisory in nature and the board would have the final say.

 

Also the clause which said Etihad will source senior executives for Jet Airways was modified and now  Etihad will recommend senior executives for appointments in Jet Airways. 

 

The two airlines inked the agreement on April 24 and as a part of the deal there will be an overall cash infusion of $ 750 million (Rs 4,500 crore) in debt and equity. The infusion would help the airline cut its debt from $ 2.1 billion to $ 1.5 billion. End 

 

Etihad will have a major role in Jet's management, says CAPA

 

Kapil Kaul of Centre for Asia Pacific Aviation said on the FIPB clearance: " FIPB approval on expected lines. This is the first t major FDI deal for aviation which  is significant for the sector  and CAPA welcomes it.  However, I continue to believe that the very liberal and exclusive bilateral granted was key to the valuation and this deal.  The manner of allocating bilaterals reflects poorly on how we govern  India’s aviation system   We  See Etihad having a major role in Jet’s operations and Management going forward even though SHA has been revised. Earlier in 2008-09, W L Ross in Spicejet  had very significant role in Spicejet’s strategy and future direction even with under 15% share holding and 1 Board seat.

Contentious Points On Which the Deal Was Stuck:

 

i) Effective Control To Be Given To Abu Dhabi-based Etihad Airways. Civil Aviation rules suggest that the effective control has to be with Indian entity or persons. 

 

Why It Has Got Approval Now:

 

ii) To reduce effective control to Etihad, its representations on the board was reduced to two from earlier three. Chairman Naresh Goyal given powers to veto any decision and a clause in Commercial Cooperation Agreement that revenue and network function will  be shifted to Abu Dhabi done away with. 

 

Other Regulatory & Government Approvals

 

iii) CCI will vet the deal as it has cast doubts over a clause that Jet will drop existing code-sharing agreement on route where Etihad operates. CCEA approval is needed as any FDI of over Rs 1,200 crore comes under its ambit. After all these green signals, the deal will come to civil aviation ministry.

Subramanian Swamy to challenge government approval to Jet-Etihad deal

The FIPB decision is so conditional that it is unprecedented. The decision has to be made now by SEBI, CCI, CCEA and the Cabinet.I dont know how long it will take for a final decision. I will go to court to challenge it whatever it is since the public interest pitfalls are uncurable by the Government. - Janata Party president Subramanain Swamy