Business Standard

Open sky: Controversy put to rest

Kumkum Sen 

Inadequate infrastructure and transportation has been India's biggest hurdles in the growth and development of its economy. The state monopoly, particularly in civil aviation and railways, had effectively trapped these sectors in a time warp. Civil aviation is an instance where the government-owned carriers, with high costs, non-availability of seats, recurrent delays and cancellations and the patronage of vested interests, made the experience of taking a flight a harrowing nightmare. However, in 1999, initiatives were taken by the government for the disinvestment of Indian Airlines and Air India, which was approved by the Cabinet, but this process was abandoned in midstream, when there was an in-principle consensus for 40 per cent divestment of which 26 per cent was to be held by a foreign airline/partner. Instead, there was this disastrous merger between the two entities and the unified Air India is yet to recover and is essentially operating on bailout packages and government largesse.

Private participation in airlines was permitted in the 1990s. The aviation sector was one of the early ones to open up. Unfortunately, the open-sky approach did not work out well. Of the initial players, only Jet has survived, with Sahara in its portfolio. New investors and operators made their entry, of whom a few, such as Paramount, have shut shop. The increase in traffic warranted not just more players but updated airport infrastructure as well. This has been taken more seriously. The N C Committee's recommendation that the private sector be involved in the construction of the major greenfield airports in the metro cities has been successfully implemented. In 2003, the Naresh Chandra Committee (NC Committee) on Civil Aviation recommended privatisation of Air India and Indian Airlines and also proposed providing a level playing field for the provision of ancillary services, instead of priority to the national carriers. However, in so far as foreign investment in the aviation industry is concerned, while 49
per cent foreign direct investment was permitted in domestic airlines under the automatic route, foreign airline companies were not permitted to invest. Hence, there was no significant foreign investment in this sector - and the open-sky policy remained restricted to the Indian operators. With the recession and oil prices going through the roof, the existing domestic players are also cash strapped.

Of this, Kingfisher, which was the rising star, has effectively downed its shutters. The government has finally acknowledged the linkage between the civil aviation sector and its impact on development. The dire need to bring in foreign investments on one side, and also increase the number of players finally motivated the government to take the decision to open up the sector for foreign investment which should have been done years ago was finally addressed when Press Note 6 of 2013 brought about a policy charge permitting foreign airlines also to invest up to 49 per cent in the paid up capital of Indian companies, and this would be under the approval route.

Why was the sector opened up to foreign airlines? For one, Kingfisher was not the only one in the red, others, including Jet, were making losses on high taxes on fuel, debts and other high operational costs. It was an industry demand. Also, with the predatory pricing, new entrants will make the market more competitive. With that, while aircrafts were acquired and foreign pilots being recruited, technology was not being upgraded.

Interestingly, the contemporaneous media reports interpreted the move to permit foreign entrants as a panacea specific to Kingfisher, as the requirement was that of investing in an existing domestic airline. Rumours of a Gulf-based airline investing in Kingfisher or Jet Air were doing the rounds.

In 2012, the civil aviation sector was opened up for foreign airline companies but subject to the limitations of Press Note 6 (2012 series) of 49 per cent through the automatic route "in the capital of Indian Companies, operating scheduled services" were permitted. However, the interpretation of the above language sparked off a minor controversy as to whether the cart had been placed before the horse in the AirAsia case.

AirAsia, which has been operating international flights in India, made the first move for setting up a joint venture with Tata Sons, holding 30 per cent and an individual holding 21 per cent. Neither entity had any aviation background. This is believed to have sparked off a controversy on the interpretation of the Press Note in question between the two ministries, given the semantics, which perhaps was not entirely unwarranted given that the perception on which the two ministries took different positions. The confusion was whether Indian joint ventures had to be functional operating air transport services provider was a pre-condition.

The Ministry of Civil Aviation's position that the Indian joint venture partner(s) were required to start active operations and meet all regulatory requirements before consideration by the FIPB.

The Ministry of Commerce and Industry, which is the policymaker, was of the that the comma after "Capital of Indian Companies" indicated that the Indian company did not have to be an existing player. The minister rightly made a statement that the policy framework was clear in its intent. Proceeding on harmonious interpretation, the conclusion was arrived at and as the Hon'ble Minister asserted as the policymaker, the intent had to be paid heed to, and not the nitty gritty.

The resultant company has to be compliant with all the regulatory requirements under the Press Note. That is a condition of the proposal. While in agreement, it may be worthwhile for the sake of good order to amend the language to get rid of the ambiguity.

Kumkum Sen is a partner at Bharucha & Partners Delhi Office and can be reached at

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First Published: Sun, March 17 2013. 20:40 IST