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ALLOWING THE INCREASE OF FDI IN SCHEDULED AIRLINES IN INDIA


AN ANALYSIS OF STATUS QUO


Introduction

The aviation industry in India has been moving at turtle speed in comparison of its counterparts globally, even though it has the 9th largest market share. This is a result of several factors such as high costs of operation, and the complexity and ambiguity in the legal structure. Through 1953 to 1990-91, the industry was wholly nationalised so as to boost its structure internally. The decision of de-regulating it was undertaken keeping in mind the availability of capital and the need for competition so as to enhance this technologically backed industry. The industry has seen the inauguration and closure of several airlines since then, however the real challenge remains in facilitating healthy competition in the industry while stabilising costs for both the passengers and the airlines. Under the current FDI policy 49% of the paid up capital of a scheduled Indian carrier can be acquired by way of foreign investment under the government approved route, provided that substantial ownership and effective control of the entity remains with the Indian company. This policy has been made keeping in mind international standards and industry requirements.


The decision of de-regulating it was undertaken keeping in mind the availability of capital and the need for competition.



Jet-Etihad deal


Since the increase in FDI allowance in Domestic Scheduled Airlines, there have been several Airlines which have been seeking such investment so as to enhance their market shares. Jet Airways, which holds the second highest market share in the Indian aviation sector has been in talks with Abu Dhabi’s national carrier Etihad Airways for investment by the later in terms of purchase of equity. The deal between the two carriers is such that Etihad will purchase 24% stake in Jet for Rs. 2,058 Cr., which is at a premium of more than 20% over the prevailing market price of Jet shares. Before this deal can go through it must pass several administrative clearances so as to assess a) an adverse economic effect on competition b) substantial ownership and effective control and c) compliance with Indian Laws. Since early 2013 this deal which is the biggest foreign investment in Indian Aviation history has gone through and is still facing several hurdles, mostly because domestic air transport is closely linked with sovereignty of national airspace and the volatile nature of the industry. More recently, the deal has come under CBI review after corruption allegations involving the deal surfaced in the Lok Sabha in this pre-election time. Evidently, given the magnitude of this deal, politicisation was inevitable. What impact it has on the industry is yet to be seen. From the legal stand point, the deal requires clearances from the Foreign Investment Promotion Board (FIPB) and the Competition Commission of India (CCI) and several other governmental bodies. The CCI, which is the fair trade regulator, is currently looking at the transaction in an ongoing case. Mr. Ashok Chawla, Chairman, CCI has stated that the Commission is seeking more details about the deal before it comes to any decision on the matter, especially with regard to the apparent shift in the control and ownership of Jet and has asked for the amended Share Holder’s Agreement (SHA) and Articles of Association after the decision of the FIPB. The FIPB on 29th July 2013 approved the deal on a conditional basis involving certain changes in the SHA viz. a) the number of directors of the Board from Etihad would be 2 as oppose to 3 under the previous agreement, leaving the ‘effective control’ with the Indian promoters having 5 seats and 7 independent directors, b) all the disputes under the SHA are to be adjudicated under Indian Law as oppose to English Law and c) requirement of governmental approval before any other changes to the SHA can be made. Further approvals are also required from the Finance Minister and the Cabinet Committee in Economic Affairs.


The real legal issue arising from the deal is twofold :- a) whether shifting of the financial headquarters of Jet to Abu Dhabi would amount to a violation of Indian Competition Law and b) whether certain rights given to Etihad would result in a violation of India’s Takeover Regulation. Both these issues pertain to the problem of “control” by a foreign entity and the complexity becomes more apparent given that the deal in its current form may just violate both the Indian Competition Act and SEBI’s Takeover Code amongst confusion regarding the FDI policy on the total foreign equity holding in an Indian Scheduled Airline.


Conclusion


The airspace of any country is a part of its Sovereign territory as per Ar. 1 of the Chicago Convention. Thus, protecting it from undue foreign influence is not just a matter economic structuring of the market but also of territoriality. Most countries which follow a liberal FDI policy in the aviation sector will allow a maximum of 49% investment. Australia is the only country in the world which allowed 100% FDI in this branch of civil aviation, keeping in mind the national conditions it imposed on Richard Brandson’s Australian airline Virgin Blue Airlines. Recently, the Mayaram Committee has proposed a recommendation for 100% FDI in Schedules Airlines as so to boost the sector. However, it is unlikely that such a recommendation would be accepted given that the Ministry of Civil Aviation rejected the Ministry of Commerce & Industry’s proposal for the FDI increase to 74% in the same sector. The reason behind this is that the Ministry of Civil Aviation is still testing the deal between Jet and Etihad so as to figure out the possible difficulties arising out of the same, while making sure that the substantial ownership and effective control of the Indian company remains in India.



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