Using FDI for a bailout

The proposed equity cap of 24 per cent is devoid of logic

The civil aviation ministry has mooted a proposal to allow foreign airlines to buy up to 24 per cent in Indian airline companies. Foreign direct investment (FDI) of up to 49 per cent is allowed in the sector; but foreign airlines cannot invest, whereas soap manufacturers can. The proposal to permit airlines is expected to work its way through the government and eventually get Cabinet approval. Whether the Cabinet will accept the 24 per cent limit or go with the Department of Industrial Policy and Promotion (which is in favour of a 26 per cent cap) is a key question.

It is obvious that foreign investment is being opened up because private airlines are strapped for cash and need equity injection; foreign airlines with a strategic view of the Indian aviation market’s long-term potential are likely to accept higher business valuations. But the influence of lobby power on government decision-making is manifest. When the government-owned Air India was desperate for cash, no one in the government thought of FDI as an option. Now that it is Vijay Mallya who needs money for his Kingfisher Airlines, policy is swinging around. Recall that the government had cited security concerns when it shut the door on foreign airlines in the 1990s; how have those security concerns vanished now? Then, it was Ratan Tata who had wanted to enter the sector along with Singapore Airlines, a move that Jet Airways opposed. Mr Mallya, it would seem, is a better lobbyist than Mr Tata. Is it too much to expect that the government will take rational and informed decisions, and not swing policy to suit the interests of favoured companies?

What makes no sense at all is the proposed FDI cap of 24 per cent for foreign airlines. No strategic investor is going to enter a business without some protection of its interests, and the usual shareholding threshold for this is 26 per cent — with which it is possible to block special shareholder resolutions. The 24 per cent equity cap, if proposed under Mr Mallya’s influence, would suggest that he is not willing to share control. He may get away with this when it comes to getting government-owned banks to convert loans into equity at exorbitant valuations, but he will not find it so easy to make foreign airlines his sleeping partners. If the government insists on the 24 per cent cap, investors will want shareholder agreements that protect their investments. So why not allow entry through the front door with 26 per cent?

Will Kingfisher’s troubles ease with equity investment by a foreign airline? Its market capitalisation has dropped to barely Rs 1,200 crore, so selling 24 per cent equity is not likely to be of much help when its debt runs into a few thousand crores of rupees, and when the quarterly losses run to more than what an equity offering might fetch. At the end of the day, the airline business has to be run on rational lines.