Kingfisher Airlines Ltd, in stake sale talks with Abu Dhabi's Etihad Airways and other investors, has capped foreign portfolio investment in the company at 3%, carving space for a foreign investor to buy as much as 46% of the embattled carrier.
India allows foreign investment of up to 49% in local carriers. Overseas institutional investors currently hold 2.46% of Kingfisher, according to stock exchange data.
Cash- and debt-strapped Kingfisher, which was once India's No 2 airline by domestic market share but has grounded its fleet since the start of October, said earlier this week it was in talks with Etihad Airways and other investors about taking a stake.
The decision to limit FII investment was taken "with a view to keeping the company's capital structure in readiness for transactions that may be identified in the future for the benefit of all stakeholders of the company," Kingfisher said in a statement on Thursday.
Kingfisher, controlled by liquor tycoon Vijay Mallya, has been trying for more than a year to find an investor, without success.
It is saddled with $2.5 billion in debt, according to one estimate.
A fresh cash infusion into the struggling carrier could come from a financial or strategic, Indian or non-resident investor, Kingfisher said on Thursday.
Shares of the company have rallied recently and were up 5% - their daily limit - for the third consecutive day on Thursday. The shares, which were trading at Rs 17.15 in early trade, have recovered sharply from their all-time low of Rs 7.05 hit in August.