Foreign airlines can control Indian carriers via group firms

While the foreign can't directly own more than 49%, their group companies or investors can fully own airlines in India with government approval

While foreign airlines can’t directly own more than 49 per cent in Indian airlines, despite Monday’s liberalised Foreign Direct Investment (FDI) policy, their group companies or investors can fully own airlines in India with government approval.

So while the likes of AirAsia and Singapore Airlines will continue to have a cap of 49 per cent on their stakes in Indian arms, AirAsia India and Vistara, foreign funds and non-airline companies will be allowed to fully own a domestic, Indian airline.

The government is looking to dilute the rule which makes it mandatory for an Indian carrier to be controlled and owned by an Indian or an Indian entity. This will increase competition for Indian airlines, as deep-pocketed airlines from the Gulf will be able to set up shops in India through their group companies.

This will allow the likes of Etihad, Singapore Airlines and AirAsia to gain management control of Jet Airways, Vistara and AirAsia India through their group companies. Qatar Airways had earlier tried to use the Qatar Investment Authority, a sovereign wealth fund, to buy into Indian budget carrier IndiGo.

“A foreign airline, through its group companies, will be able to own a carrier in India, this will require some amendments to the current rules SOEC (substantial ownership and effective control) norms,” said a senior civil aviation ministry official.

“Increasing stake to 100 per cent is only permitted through the government route, Foreign Investment Promotion Board along with the ministry will examine carefully and decide on case-by-case basis,” the official added.

However, airlines controlled by foreign nationals may not get the right to fly to those countries which adhere to the SOEC norms of ownership and effective control. If a country does not permit foreign nationals to own airlines, these foreign-controlled airlines from India cannot fly to those countries. Under the bilateral air service agreements, countries have traditionally refrained from giving operating permission to foreign carriers which are not effectively controlled by the designating country or national. “Changes to air service agreements depend on the partner country. If it allows, why should we object?” another ministry official said.

“The landmark FDI announcement allows 100% investment by foreign entities in Indian carriers. Some of the bilateral agreements that India has with other countries may have restrictions related to substantial ownership and effective control by Indian nationals.  The same may need to be amended in line with the FDI policy reform. In case any country does not agree to such a change, it may need to be resolved diplomatically.  We do not foresee much challenge there," said Amber Dubey, partner and India head of aerospace and defence at  KPMG.

WIND BENEATH THE WINGS

• Present norms will require dilution of the current substantial ownership and effective control norms
• Air Operator Permit will regulate scheduled carrier and will be given only to an Indian citizen or  substantial ownership & control is vested in Indian nationals
• Airlines controlled by foreign nationals might not get the right to fly to those countries which adhere to the SOEC norms
• FIA said the SOEC norms are important from a security perspective

The Federation of Indian airlines (FIA), which represents incumbent Indian airlines IndiGo, Jet Airways, SpiceJet and GoAir, had earlier said the SOEC norms are important from security perspective. “It needs to be recognised that SOEC is one of the cornerstone of Indian policy, it is not without reason that proponents of free market economies like the US and the EU impose restrictions on SOEC of an airline,” FIA said in its submission to the ministry. “This is unfortunate, we have sold our country in one of those few sectors where an Indian carrier can take on the very best in the world,” said a top executive of one of the FIA members.

Experts said an Indian entity can be in effective control despite not owning a majority stake. “It can be stipulated that despite having 40 per cent shareholding, the Indian entity can retain effective control by having the right to nominate majority of directors on the board, nominating chairman/managing director, right to formulate and implement policies,” said Lalit Bhasin, managing partner of Bhasin & Co.

Civil aviation secretary R N Choubey said, “The step to allow foreigners to own carriers in India is a positive step for the sector and will increase competition, leading to benefit for the passengers.”

“We value our strategic partnership with Jet Airways and will carefully examine the government decision made on a revision of the FDI rules in the civil aviation sector,” Etihad Airways said in a statement.
 
“We are happy with the partnership that we have with Tata Sons and at this point there are no plans for changes to our 49 per cent ownership of Vistara,” said a spokesperson of Singapore Airlines.