Jet-Etihad deal hits Sebi, DIPP roadblocks

Concerns over effective control not addressed in revised shareholders' pact, says DIPP; Sebi opposes commercial pact

Ahead of the Foreign Investment Promotion Board’s (FIPB’s) meeting on Monday to discuss the Rs 2,060-crore Jet-Etihad deal, the proposed agreement has run into rough weather. This time, the Department of Industrial Policy & Promotion (DIPP), as well as the Securities & Exchange Board of India (Sebi) have raised concerns on effective control being given to the Abu Dhabi-based airline.

Following earlier concerns, Jet and Etihad filed a revised shareholders’ agreement (SHA) with DIPP and FIPB. This, too, doesn’t seem to have gone down well with DIPP, which has found the “tone and language” is “similar to what it had submitted earlier”.

Meanwhile, Sebi is understood to have written to the Department of Economic Affairs (DEA) that the commercial cooperation agreement (CCA) should not be entered into by the two airlines at this juncture. The Sebi view is that the operational control of India’s largest private carrier, Jet Airways, is likely to get transferred to a foreign player after stake sale to Etihad Airways.

Sebi’s objection here is significant, as the deal might fall apart if the CCA is not struck. That’s because the agreement is one of Etihad’s conditions for making investments in the debt-ridden Jet Airways.

The CCA prescribes that Etihad could source candidates for senior management positions after the acquisition of stake in Jet. The two airlines further plan to shift network and revenue management functions to Abu Dhabi and consolidate sales office, according to a general sales agreement, to support Jet’s sales in the UAE.

The CCA requires Jet to exit from existing code-share arrangements with third parties on routes where Etihad or its affiliates operate. It also says that Etihad will take the lead role in negotiating with suppliers. Sebi is of the view that these clauses give Etihad the upper hand in operational matters.

Further, under the corporate-governance code, the nominations committee of Jet-Etihad has exclusive powers to recommend the appointment or removal of independent directors and the CEO. Sebi says the committee should not undermine the authority of the board. It adds the powers of the nominations committee should be removed and the supremacy of the board restored.

According to sources, Sebi has said the current corporate-governance code, which holds that board resolutions can be passed with a three-fourths majority, is against the provisions of the Companies Act. Under the current arrangement, all major decisions will have to be approved by Etihad.

This will give the Abu Dhabi-based airline substantial control over the Indian one. Sebi has suggested the clause be amended for passage of resolutions by simple majority.

According to the current shareholders’ agreement, Etihad will get three board positions, while Jet will have four. There will be seven independent directors on the board. In simple words, the proposed amendment means that vote of eight board members will be sufficient to pass a resolution.

DIPP has, apparently, also put a question mark on how equity investments made by Naresh Goyal, a non-resident Indian, will be treated in the entire calculation of foreign investment in the deal. This is because, if Goyal’s equity participation is summed up with Etihad’s 24 per cent stake, the FDI limit of 49 per cent “will be easily breached”. Goyal has a 66 per cent equity stake in the airline.

The whole drama seems to be taking an interesting twist, with Commerce Minister Anand Sharma understood to be batting for the deal to go through. He is learnt to have directed DIPP to work out a mechanism on NRI investments under the extant policy, so that the investment proposal goes through smoothly.

AN AIR POCKET?
Sebi’s concerns (as told to DEA)

• Commercial pact should not be entered into, as it gives Etihad the upper hand in operational matters
• Etihad, under the pact, gets rights to source candidates for senior management positions
• The airlines plan to shift network and revenue management functions to Abu Dhabi and consolidate sales office/general sales agreement to support Jet’s sales in UAE
• Lead role in negotiating with suppliers, according to pact, will be Etihad’s
• Corporate-governance code clauses should be amended for passage of board resolutions by simple majority. Under current arrangement, resolutions are passed with three-fourths majority, giving Etihad the right to approve all decisions
• The nominations committee should not have exclusive powers to recommend appointment or removal of all independent directors and the CEO. These powers are against the provisions of the Companies Act

DIPP’s concerns on the revised shareholders’ agreement

• Effective control and ownership lie with Etihad, and not Jet
• If Naresh Goyal’s stake is included, the 49% FDI limit is breached
• Under the FDI norms, rights for voting and nomination should stay with Jet