Analysis: Etihad has the upper hand in the Jet deal

The present government’s desperation is increasingly visible as it bends every rule in the book to prove that its reform measures are working. The Etihad-Jet Airways deal, the only one which has happened, after it cleared 49 per cent FDI (foreign direct investment) in airlines had been stalled by the Foreign Investment and Promotion Board (FIPB). Now the government is planning to allow foreigners to bypass FIPB approval for investment in the country.

This could become a bad precedent and, in turn, demonstrate complete disregard to Indian shareholders.
The Etihad-Jet Airways deal is one-sided and will benefit the Abu Dhabi airline more than the Indian one. Jet Airways was in serious trouble when it went seeking for money from whoever was willing to look at it. Etihad naturally extracted its pound of flesh when it signed the deal.

Though Etihad invested only 24 per cent in Jet Airways, it managed to avoid triggering the takeover code. The code is activated either when the investment crosses 25 per cent of shareholding or when the ‘control’ clause is triggered. It is the definition of ‘control’ as per the Companies Act which is the bone of contention in the deal, let alone the impact cost on other airlines, especially Air India.

A report in The Economic Times says that  Etihad’s say on the board will be equal to that of Jet's management despite having only 24 per cent stake. The report, which quotes from the shareholder documents suggests that two-third majority is needed to pass all resolutions. This means that the Jet management cannot take decisions on its own and will have to take a clearance from Etihad even in routine matters.

Etihad’s clout on the board is similar to that of Jet, says the report. Both airlines have one nominee each and there are three independent directors. The most important concessions that Etihad has extracted are with regard to approval and voting on most decisions.

The report says that the appointment and removal of CEO and independent directors should be done by two-thirds majority and not by a simple majority as provided in the Companies Act. A two-third majority is also required to pass resolution in board meetings. As per the Companies Act two-third majority is only required in matters such as capitalisation and dividend declaration issues. The two-third clause means that all decisions needs to be cleared by Etihad’s member.

In operational matters, Etihad has asked for co-location or network and revenue management which will be relocated to Abu Dhabi, that too at the expense of Jet Airways. In a phased manner this type of operational control will be shifted to Abu Dhabi.

Even without passing on control, the Jet management has effectively ceased control of its operational freedom. Fear of ‘passing’ on control or a joint-control led to FIPB and SEBI putting a spoke in the deal.

In order to circumvent this issue, the government is considering bypassing FIPB approval. But in doing so it is harming the existing shareholders of Jet Airways. Etihad with its centralised operations management in Abu Dhabi will seek to protect its interest first rather than that of Jet Airways and its shareholders.

FIPB and Sebi protect and regulate investment in Indian companies in such a way that the interests of shareholders are protected when promoters sell stake in their companies and not sell the companies' interest. Unfortunately the political class, especially the present one, has no such mandate.