DIPP floats draft note on allowing FDI in domestic airlines

The Industry Ministry has recommended allowing foreign airlines to pick up stake in domestic carriers but with a cap of 26% -- a major move to liberalise the cash-strapped sector.

In a draft Cabinet note, the Department of Industrial Policy and Promotion (DIPP) has proposed 26% FDI in domestic carriers, highly-placed sources told PTI.

The nodal Civil Aviation Ministry could change its stance, they said. The Aviation Ministry has so far been opposing allowing foreign carriers to invest in their Indian counterparts on the grounds that it was not a practice in many major countries like the US.

Maintaining that no foreign player will be willing to invest in an Indian entity with a 24% equity cap-- suggested by the Aviation Ministry-- sources said such a low stake might not be an agreeable option as that would not give a right to block a special resolution in a company.

Any equity holding greater than 25% gives a right to block a special resolution.

"The DIPP has circulated the draft Cabinet note for inter-ministerial consultation. The Civil Aviation Ministry is in favour of opening the sector for foreign players," they claimed. Such a move would help bring in capital and international practices, they added.

"The Indian aviation industry is in a crisis and allowing foreign players into the sector would help in its recovery," PricewaterhouseCoopers Executive Director Akash Gupt said.

However, a strong feeling exists among major airlines, like Jet Airways, that fledgling Indian carriers would be susceptible to hostile takeovers as they have been passing through a difficult financial period. But the proposal has seen open support only by Kingfisher promoter Vijay Mallya.

Interestingly, the Federation of Indian Airlines, an umbrella body of Indian carriers, says "it is important that India seek reciprocal opening of the airline industry in other countries, before allowing open access of its market to foreign carriers".

"In an environment where restrictive foreign ownership in the airline industry is the norm, this protects the foreign carriers from both targeting Indian carriers for acquisition; and also using bilateral air service rights to their advantage," FIA says in its discussion paper.

Those opposing entry of foreign carriers feel that these airlines, with deep pockets, could play havoc with the domestic market. They could also artificially lower the price of air travel to kill domestic competition.

Similar laws barring investment by foreign airlines prevail in several countries, including the US and Canada. The US limits the amount of foreign ownership in its domestic airlines to a maximum of 25%.

A few years ago, the US Congress and the Department of Transportation thwarted attempts to allow foreign ownership in American airlines; it did not allow British business magnate Richard Branson to launch a 100%-owned low-cost airline in the US.

Richard Branson's brainchild Virgin America is 75% owned by US-based Black Canyon Capital LLC, with Virgin Group owning the rest.

Indian aviation officials, requesting anonymity, said it was important that the country sought reciprocal opening of the airline industry in other countries before allowing open access of the Indian market to foreign carriers.

Officials said that the prevailing financial market conditions "do not seem to support" the cash-strapped Indian aviation industry.

However, the proponents hold that FDI by foreign airlines should be driven purely by economic considerations. They cite various examples in Europe where airlines have carried out cross-border mergers and acquisitions, like German carrier Lufthansa merging with Swiss International Airlines, and Air France acquiring Dutch carrier KLM.