The Cabinet on Friday decided to allow foreign air carriers to take up to 49 per cent stake in domestic airline companies, ending five years of dithering in the face of opposition from sections of the political spectrum.
Addressing a press conference after the cabinet meeting, Anand Sharma, commerce minister, said: “Detailed rules for the FDI will be framed by the ministry of civil aviation. However, the chairman and two-thirds of the directors of the company have to be Indians.”
Reacting on the FDI approval, Ajit Singh, the civil aviation minister, completely ruled out Air India, the government-owned carrier, opting for FDI. He said, “The decision sends a clear message for the sector that is under stress. Now, the banks can look at them favourably. The managerial and technical expertise will be available to local airlines, plus everything that goes with this. Code sharing benefit will also be there.”
Participation would not be through automatic route. Clearance from the home ministry and Foreign Investment Promotion Board will be required, he added.
The foreign investment would be subject to other conditions, including substantial ownership and effective control of the airline being vested in Indian nationals. All foreign nationals associated with the Indian company as a result of the investment will have to undergo security clearance and all technical equipment imported into India following the investment, too, will require civil aviation ministry clearance.
The move, however, say analysts, is not expected to see the floodgates opened for investment by foreign carriers. For, most domestic carriers looking for money are financially strained and might not be attractive targets for investors. However, it does bring a positive environment to a sector where companies are reeling under financial pressure.
Domestic carriers have long lobbied for the move, which they hope would provide funds to keep them afloat.
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Opening the sector might not immediately lead to foreign airlines picking up stakes, considering the high taxation and regulatory uncertainties in India.
SpiceJet and GoAir have also said they are open to foreign airline investors.
Under the current policy, while FDI up to 49 per cent is allowed in an airline company, the rules bar foreign carriers from directly or indirectly holding any equity. Non-resident Indians are allowed to invest up to 100 per cent in airlines.
| CLEARED FOR TAKEOFF, FINALLY | ||
| Key policy change Earlier, foreign entities were allowed to invest 49%, but not airlines. Now, foreign airlines can pick up 49 % stake in Indian carriers | Who wants it ? Domestic airlines Kingfisher, SpiceJet & GoAir. GoAir Managing Director Jeh Wadia recently criticised govt for delay in approving the policy | Who is keen to invest ? Major Gulf carriers such as Etihad and Qatar Airways. International Airlines Group (British Airways) |
| On a buying spree | ||
| Etihad - Over the last two years, Abu Dhabi-based Etihad has picked up stakes in AirBerlin, Air Seychelles and in Aer Lingus (Ireland) and Virgin Australia | Qatar Airways - Last year, Qatar Airways picked up 35% stake in Cargolux, expanding its access to the European markets | British Airways - Last year, it merged with Spanish carrier Iberia, creating Europe's third largest airline group after Lufthansa and Air France-KLM |
| Issues raised by potential investors | ||
| Not in favour of 49% cap on investment, need relaxation, said airlines’ heads at IATA meet | Want liberalised bilateral rights for private Indian carriers | Minimal interference by government. Continuity in government policies |
Trinomool Congress supremo Mamata Banerjee, whose party is a constituent of the UPA government, has openly opposed the FDI move, raising concerns about security if foreign airlines are allowed to invest.
Earlier, Ajit Singh had a series of meeting with Banerjee, to allay her fears on the issue.
Anticipation that the new FDI policy would be cleared had seen stocks of listed aviation companies zoom. Kingfisher Airlines’ shares surged 7.9 per cent, closing at Rs 10.81. SpiceJet rose 4.4 per cent, to close at Rs 34.50 on the Bombay Stock Exchange. Even Jet Airways gained two per cent, to hit Rs 368.35. Kingfisher has already said it had been talking to foreign carriers to bring them in as their partners.
Issues, prospects
“Allowing 49 per cent stake to foreign airlines will create access to capital, global connectivity, technology and best practices. This could lead to establishment of new airlines in India and, perhaps, a change in ownership structure of certain carriers. All this augurs well for Indian passengers. Increased competition would lead to better offerings, greater efficiency, cheaper airfares and more power to the passenger,” says Amber Dubey, partner and head, aviation, at global consultancy KPMG.
Among the foreign airlines, Gulf carriers such as Etihad, Qatar Airways and British Airways, through its investment arm, International Airlines Group (IAG), had earlier shown interest on investing in domestic carriers. However, an IAG spokesperson officially said it had no immediate investment plans in India.
Foreign carriers at the International Air Transport Association conference in Beijing this June had raised concerns on the restrictive FDI proposal the Indian government was trying to push and had said a minimum 51 per cent FDI which would give them majority equity would be acceptable. International carriers had also said the government should liberalise the restrictions put on bilaterals to make investments in India attractive.
Domestic carriers, led by struggling Kingfisher, have long lobbied for the move, which they hope would provide much-needed funds to keep them afloat. SpiceJet and GoAir have also said they are open to foreign airline investors.
Ratan Shrivastav, an aerospace expert from Frost & Sullivan, remarked: “FDI will not bring in hard cash alone. Domestic carriers can look forward to global standards and benchmarks in professional service and access to engineering services, and support from foreign airline partners. India needs aviation FDI not to sustain the present model but to take it to the next level, to increase growth and enable connectivity.''
Others say they do not think FDI will be the only thing to help airlines. Amrit Pandurangi, senior director, Deloitte, in India, said, “I don’t think FDI in aviation will solve all the problems but it is definitely a welcome move. Right now, the problem with the aviation sector is profitability, on account of high taxes on ATF, airport charges and keeping the fares artificially low. FDI can’t solve that problem. But equity infusion will definitely help airlines in scaling up their operations and expanding their networks.”
Opening the sector might not immediately lead to foreign airlines picking up stakes, considering the high taxation and regulatory uncertainties in India. "Any investor would like to ring-fence its investment,'' says Shrivastav.
“India is an untapped market where under one per cent of the population uses air travel, so for an outside investor, it has huge growth and long-term prospects. However, FDI from foreign carriers will depend on restrictions or elements that prohibit or stifle ownership and growth, so investors will be more cautious than overzealous,'' said London-based aviation expert Saj Ahmad.
Foreign welcome
Foreign airlines have welcomed the move. Said an IAG spokesperson, parent company of British Airways:“Our aim is to be a global airline group and we are pleased with any steps towards full liberalisation of the aviation industry. India is a key market for us and we will monitor the changing regulatory environment but at this stage, we have no plans to invest in any Indian airline.”
The largest Gulf carrier, Emirates, welcomed the reform. "India is one of world's most important aviation markets. While Emirates' philosophy is to focus on organic growth, we always welcome any reform which liberalises markets, including FDI rules." a spokesperson said.
While choosing not to comment on its strategy, an Etihad Airways spokesperson said, “We see equity as a positive reflection of our partnership approach; we will make such investment where we believe the commercial prospects are strong, where we see like-minded business philosophies and where we believe such commitment will be welcomed."