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The Foreign Investment Promotion Board (FIPB) on Monday gave its conditional approval to Jet Airways’ proposal to sell a 24 per cent stake to Abu Dhabi-based Etihad Airways for Rs 2,058 crore.
A senior civil aviation ministry official said: “All concerns raised by authorities over effective control of Jet Airways have been addressed in the revised proposal. Etihad would now have two directors on the 12-member board. The role of all committees would be advisory in nature. Board resolutions will be passed by a simple majority, leaving control in the hands of the Indian promoter.”
The approval from FIPB has, however, come attached with certain riders. First, the Naresh-Goyal-promoted airline will have to seek prior approval from the government for making any changes in the shareholders’ agreement (SHA). Also, any arbitration will have to be under the Indian law, and not English as proposed in the revised SHA given by Jet-Etihad to FIPB.
“There are certain provisions in the Aircraft Rules, the Civil Aviation Requirements (CAR) which have to be complied with. The chairman has to be an Indian. All management changes will have to be referred to the ministry for clearance. Disputes in the shareholders’ agreement have to be resolved under Indian laws and not English law as has been stated in the revised agreement,” the official added.
In all, the Jet board will have 12 members, comprising two directors from Etihad, four from Jet and six independent ones. Chairman Naresh Goyal will have the veto power, diluting Etihad’s powers. “Goyal, with a 51 per cent shareholding, has four directors; and Etihad, with half the number of shares, had three members. As concerns were being raised over control shifting to foreign hands, it was felt necessary to lower Etihad’s representation to two,” a source said.
Etihad, however, has the right to appoint the vice-chairman.
Board resolutions would now be passed by a simple majority, and not by three-fourths majority proposed earlier. With the supremacy of the Jet Airways board restored, the airline will continue to have its principle place of business in Mumbai. The commercial cooperation agreement (CCA) between the two airlines had earlier prescribed that network and revenue management functions would be shifted to Abu Dhabi after the stake sale. This had been objected to by the civil aviation ministry.
The revised corporate-governance code adds all committees formed by the two airlines for administrative and operational functions will be advisory in nature. Also, the clause that said Etihad would source senior executives for Jet has been modified. Now, Etihad can only recommend senior executives for appointments in Jet.
All appointments would be made by the board of Jet Airways. The corporate-governance code had given exclusive powers to the nominations committee of Jet-Etihad over the board’s appointment or removal of independent directors and the chief executive officer. Sebi had objected to this, saying the nominations committee should not undermine the authority of the board.
A Jet Airways spokesperson refused to comment at this stage, as other regulatory and government approvals were still required.
The proposal will now be forwarded to the Cabinet Committee on Economic Affairs (CCEA), which decides on all applications for foreign direct investment of more than Rs 1,200 crore. Once cleared by CCEA, the deal would be scrutinised by the ministry of civil aviation for compliance with provisions under the Aircraft Rules, 1937.
Separately, the Competition Commission of India (CCI) is examining the commercial cooperation agreement between the two airlines which requires Jet to exit from existing code-share arrangements with third parties on routes where Etihad or its affiliates operate. CCI is seeking a clarification, as the clause can be perceived as anti-consumer because it limits the choice for passengers.
STICKY ISSUES
The clearance came after the contentious ‘effective control’ concern was addressed
Hitch
FDI policy says effective control in an Indian entity should be vested in Indian nationals. In this case, it was shifting to Etihad
Remedy
- Etihad agreed to lower its representation on the Jet board from three to two
- Chairman Naresh Goyal was given the veto power on all decisions
- The clause in the commercial cooperation agreement that said revenue and network functions would be shifted to Abu Dhabi was removed
THE WAY FORWARD
CCI: The deal will be vetted by the Competition Commission of India because of a clause that Jet will drop its existing code-share agreements on the routes where Etihad or its affiliates operate
CCEA: An approval from the Cabinet Committee on Economic Affairs will be required because the deal is worth Rs 2,058 crore. All FDI applications of more than Rs 1,200 crore come under its ambit
Ministry: After all these green signals, the deal will have to get a final clearance from the civil aviation ministry
NUTS & BOLTS OF THE DEAL
As part of the deal, there will be an overall cash infusion of $ 750 million in debt and equity. The infusion will help Jet cut its debt from $2.1 billion to $ 1.5 billion
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$379 million
Equity investment -
$150 million
Investment in Jet’s frequent-flyer programme -
$150-million loan
Assistance to be provided in securing debt -
$70 million
Sale and lease-back of Jet’s Heathrow slots
