AirAsia, Indian?

Questions about foreign ownership of domestic airlines

Questions are again being asked about the degree of control that foreigners have over Indian airlines. In 2012, the then United Progressive Alliance government liberalised foreign direct investment rules in Indian carriers, allowing 49 per cent ownership by foreigners in domestic airlines through the automatic route - as long as control remained with an Indian partner. Several airlines began operation shortly after this provision came into effect, including AirAsia and Vistara. The current discussion, following a report in the Mint, centres on whether the domestic company AirAsia is in fact controlled by Malaysia-based AirAsia Bhd. The Malaysian company owns only 49 per cent of the airline, the limit in law; the remainder is held by Tata Sons and by Arun Bhatia of Telestra, who it was recently reported, would sell his stake to Tata Sons, giving the latter a majority stake in the Indian airline. However, it has long been alleged that the domestic shareholders are bound by an excessively detailed brand licence agreement - this was the subject of public interest litigation from Subramanian Swamy shortly after the joint venture was announced. The allegations are that operating requirements in a large number of fields are spelt out in the brand licence agreement in such detail that there is, in effect, no control vested with domestic shareholders, and that this is therefore a violation of the law that requires domestic Indian airlines to be controlled by the domestic shareholders.

This is an allegation that requires more careful investigation than the civil aviation authorities have undertaken so far. It is vitally important, in order to ensure the existence of a level playing field, that such rules are not broken by any player. Questions have also been asked in the past about the nature of control that foreign investors have exerted over Indian airlines. Abu Dhabi-based Etihad's stake in Jet Airways, for example - though it has helped the latter capture a big share of international traffic - has nevertheless raised eyebrows. Still, there the shareholder agreement was, according to reports, vetted to ensure it did not violate control laws. AirAsia must be asked to submit its brand licence agreement to similar examination.

This controversy also leads to consideration of the larger policy question. What benefits accrue from this requirement that domestic airlines be domestically controlled, and whom does it benefit? Many countries have blindly followed regulation in the United States passed as long ago as 1938 that restricts foreign ownership of domestic airlines. But, as it happens, the times are changing. The US and the European Union signed an agreement under President Barack Obama committing themselves to change this requirement and allow foreign ownership of each other's domestic airlines - if the former's sclerotic legislative branch can manage to pass an amendment. Certainly, the national interest in protecting control of domestic airlines has never been fully spelt out - and it is particularly odd in an era when the hardware airlines operate is frequently leased, and even domestic capital that owns shares might be in effect controlled from abroad, as is the case, some argue, with Australia's Qantas. Airlines are a notoriously capital-heavy and crisis-ridden sector, and it is most efficient to maximise the catchment area for the capital they need. While it is essential that the law, as it stands, be followed by every single operator - and thus AirAsia must answer the questions being asked - it is also perhaps time for a discussion on the benefits of the law.