 "Behind the invisible hand")
The concept of substantial ownership and effective control is inherent in aviation law globally. Experts debate the pros and cons of India's position, in light of the issues raised over the foreign partner's alleged control over AirAsia India operations
Aviation sector poses no security concern: Lalit Bhasin
Read more from our special coverage on "AIRASIA INDIA"
The question of substantial ownership and effective control is an area that concerns not just the aviation industry in India. The expressions - ownership and control - have been used in various enanctments. These include in Companies Act, erstwhile MRTP Act, Competition Act, 2002, and the Sebi Takeover Code.
Significantly, Press Note No 6 (2012 series) mandates that scheduled operator's permit can be granted only to a company "the substantial ownership and effective control" of which is vested in Indian nationals. Similarly, Section 1(ii) (c) of Schedule XI of Aircraft Rules, 1934, mandates, that (a) 'substantial ownership' and (b) 'effective control' of such entity (to whom the scheduled operator's permit be granted) be vested in Indian nationals. However, neither 'substantial ownership' nor 'effective control' is defined either under the Aircraft Act 1934 and the Rules thereunder, Press Note No 6 of 2012, or any other legislation/policy governing the sector.
While it is easier to define substantial ownership, it is not an easy exercise so far as effective control is concerned. Even with regard to substantial ownership, the percentage may not indicate the actual ownership. In a company where shareholding is fragmented among major shareholders holding, say, 30 per cent, 20 per cent and the remaining by public at large, even a 30 per cent would constitute substantial ownership. There are companies in India where shareholding even to the extent of 15 per cent gives effective control and management to the shareholder.
According to the FDI Policy (2015), foreign airlines are allowed to invest in Indian companies operating air transport services up to 49 per cent of their paid-up capital. However, in view of the declared open sky policy of the Centre, it would be prudent to have FDI even to the extent of 51 per cent, thus giving not only substantial ownership but also effective control to the foreign investor. There can be no security concerns for the simple reason that various foreign airlines already operate in India under reciprocal and bilateral arrangements.
Unlike the defence sector, this is not an area where Indian airlines should be protected. It is not necessary to specially define substantial ownership and effective control as there will always be some ambiguity and controversy about their meaning and significance. Moreover, it will depend on the factual position in each case, which would require approval. For instance, a foreign investor may have majority ownership but by virtue of agreement with the Indian party, it may not have effective control or it can be even vice versa.
The author is managing partner, Bhasin & Co
Effective control dissolves into many forms: Sanat Kaul
Under the new FDI guidelines , a foreign airline can have a 49 percent equity in an Indian airline with the proviso that the chairman and two-third of the board members must be Indian nationals. At the same time, there is no restriction on the nationality of key personnel like the COO, CEO, CFO or the commercial or operations chief provided they get security clearance from the home ministry. In other words, if the minority foreign airline keeps its own key personnel, it can effectively control it de facto without violating the rule. And herein lies the rub. As we move towards globalisation, the old concept of "substantially owned and effectively controlled" will perhaps need to be diluted.
Since entry to a country's market was restricted by international convention, some aberrations developed to bypass this rigidity. First was the concept of code share with another airline. You can travel in a third airline from a third country to a fourth country on your country airline ticket on a code-share flight. An airline may not own an aircraft, but could run a leased aircraft of another airline. With these sophistications the concept of national airline gets diluted along with the concept of effective control.
Therefore, the concept of effective control is slowly losing its meaning and is taking many forms. But dilution of equity of 49 per cent in favour of foreign airline in India moves in the direction of losing the "effective control".
The author is chairman, International Foundation for Aviation, Aerospace and Development, India Chapter
Best to trust government's judgment: Debanshu Mukherjee
Both the FDI policy and the Director General of Civil Aviation (DGCA) guidelines on operation of domestic passenger airlines require the substantial ownership and effective control of such airlines to be vested in Indian nationals. Given the FDI cap of 49 per cent (including investments by foreign airlines), the term 'substantial ownership' can be interpreted to mean ownership of 51 per cent or more of the paid-up capital. Insofar as the definition of 'effective control' is concerned, since there are no objective tests to determine whether a person has the right to control the management or policy decisions of the company, such determination requires a factual analysis in every case.
Going by the arguments advanced by the government before the Delhi high court in the Air Asia case, it is clear that one of the policy objectives at the time of liberalising this sector was to incentivise foreign airlines to invest in greenfield projects in India. Commercially, if the government expected well-established foreign airlines to invest in new projects, it would be naïve to think that such investors would allow their brands and business know-how to be used for Indian operations without retaining some degree of control (and justifiably so, to protect the uniqueness of the brands involved). In such cases, as long as the Indian partners have the right to take at least some key business decisions on their own, the policy should be interpreted liberally and the foreign airline should not be seen to have 'effective control' of the company.
It is pointless to draw analogies from the interpretation of 'control' under the highly legalistic Sebi regime where the definition serves a very different purpose.
Given that such investments can only take place with prior approval of the government (FIPB) in India, in the interest of promoting greater certainty and competition, as long as the representations made by the investor at the time of seeking the approval are not found to be false at a later stage, it would be best to trust the government's judgment on whether the airline is effectively controlled by Indians or not.
The author is senior resident fellow at Vidhi Centre for Legal Policy
