Magic Air plans fly into rough weather

Ministries differ over investments by PIOs.

Magic Air, the new budget airline promoted by Nira Radia, has entered a zone of turbulence with the finance ministry and the civil aviation ministry taking the view that investments in the sector by persons of Indian origin (PIOs) should be treated as foreign direct investment and not at par with investments by non-resident Indians (NRIs).

British citizen Radia, a PIO, holds 60 per cent of Magic Air's equity and proposes to place the rest with foreign funds. If these views hold, the company will unequivocally breach the 49 per cent foreign direct investment (FDI) cap imposed by government policy on airlines.

Radia's only hope, it seems, is the department of industrial policy and promotion, a part of the commerce and industry ministry, which wants investments by PIOs to be treated at par with investments by NRIs, who are free to hold the entire equity of a domestic airline.

The two do enjoy parity in certain sectors and in December 2002, Digvijay Singh, minister of state for external affairs at that time, had said in Parliament that all PIO card-holders "shall enjoy parity with NRIs in respect of all facilities available to the latter in the economic, financial and educational fields, except in matters relating to the acquisition of agricultural/plantation properties".

When contacted, Magic Air refused to comment on the issue.

If the DIPP fails to swing it, Radia will have to either become an Indian citizen or change Magic Air's equity holding pattern.

According to the original plans of the carrier, it wanted to take off in the domestic sector on October 31 with a fleet of 10 aircraft in the first year of operations.

The government raised the FDI cap in the aviation sector from 40 per cent to 49 per cent in November 2004, when the Cabinet also allowed 100 per cent investment by NRIs in Indian carriers. However, the Cabinet had not taken any call on the status of PIO investments.

While considering the FDI norms proposed by the civil aviation ministry in November, the Cabinet had also observed that the issue of PIO card-holders being accorded parity with NRIs in case of FDI may be examined in a time-bound manner. The Cabinet had asked the department of economic affairs (DEA) about its views on this issue.

The DEA is of the view that PIO investments should be treated as FDI. "Air transport sector (domestic airlines) is an extremely important sector, which requires management and technical skills and financial strength of a very high degree for successful operations. Generally, PIOs enjoy investment opportunities in various areas at par with NRIs. It appears that for strategic reasons, PIOs have not been allowed equal investment opportunities with NRIs in air transport services. The current policy should continue," the DEA had said.

Foreign investment norms in aviation companies have strict conditions to ensure that effective control of the airline is in Indian hands. The present norms also bars foreign airlines from investing in Indian private carriers. The policy also does not allow funds with foreign carriers as investors to invest in Indian private carriers.