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DGCA diktat on 'control' will affect FDI in airline sector

Regulator has said foreign partners in airline business cannot control the management of the domestic operator

Shishir Asthana  |  Mumbai 

The Directorate General of Civil Aviation (DGCA) has formally revised the Civil Aviation Requirement (CAR) on the right to control the management of the domestic operator. DGCA says foreign airlines, foreign investing institution or others on their behalf cannot enter into an agreement with an Indian carrier to control the management of the domestic operator.

The move, experts say will affect the Jet-Etihad, AirAsia-Tata and Tata-Singapore Airlines deals. All the three deals are at various levels of clearances in the government bureaucracy.

The obvious question is why the DGCA did not make its stance on control clear when the sector was opened up for foreign investments. And secondly, will such loosely worded CAR prevent the existing deals?

The key and controversial word in DGCA's statement is 'control'. The definition of 'control' is prone to interpretation since the time the law was drafted.

The Jet-Etihad deal best exemplifies the exploitation of the word. While Etihad followed the letter of the law in reducing its number of directors on the board and adhered to the shareholding criteria, it is an open secret on who is actually running the show in Jet Airways. All one needs to look at is the recent senior-level resignations and rescheduling and cancellation of Jet's flights in order to favour Etihad connecting flights.

It is foolish to believe that a foreign airline would invest in an Indian airline and have no say in its operations. All the airlines seeking money are in a poor financial state and are desperate for money. Their balance sheets are no longer bankable. Apart from predatory competition, these also have poor management decisions to blame for their financial health. No foreign airline would like to hand over their money to these without controlling the purse string.

What the DGCA is trying to say is that foreign airlines' money is only welcome, not their expertise in running a profitable airline.

Take the AirAsia-Tata-Bhatias deal. The only reason the deal was struck in the first place was to capitalise on the management skill of Tony Fernandes in running AirAsia and making it one of the finest low-cost carriers in the world. Tony Fernandes would not have given his money to the Tatas and watch them run the show. It is his hands-on approach in running a tight ship with very high level of efficiency that resulted in the joint venture.

What adds to the confusion, apart from a total lack of understanding of business requirements, is the definition of 'control'. There is no uniformity in the definition of control among various bodies involved in a cross-border deal.

The Foreign Exchange Management Act (FEMA), which controls FDI flows, does not have a definition for the term. The old Act defined it as 'majority shareholder', while the new Companies Act has a broader view and has aligned itself with SEBI's definition of control. But SEBI's definition under the Takeover Code itself is loosely worded and open to interpretation. Sebi's regulation recognises shift of control when a minority sharholder acts in concert with the promoter or the management. Sebi's Takeover Regulatory Advisory Committee has left the issue open by saying that the issue should be seen on a case-by-case basis.

In short, the DGCA has added to the confusion by issuing the revised CAR without bothering to define 'control'. These 'vague' laws have prevented investments in the country for a long time. The DGCA, by changing the rules half way through the game, has not helped anyone.

First Published: Wed, April 16 2014. 17:16 IST
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