Big Bang Friday – Indian cabinet clears foreign direct investment (FDI) in the civil aviation sector

This has been an interesting week for civil aviation in India.

Last Saturday saw the much delayed arrival of Air India’s first Boeing 787 Dreamliner at New Delhi. The national carrier had taken delivery of VT-ANH just two days earlier. See a video of the 787 being assembled.

Very early, yesterday morning, September 13, saw the arrival of the new Boeing 747-8i as German carrier Lufthansa upgraded its Frankfurt Bangalore route to the new aircraft type, which features its great new business class. Bangalore is the third destination in the world behind Washington Dulles and New Delhi, for the latest avatar of the Queen of the Skies. See a photo of the water cannon salute. Read our review of the new business class.

Just a little while earlier, India’s Cabinet Committee on Economic Affairs (CCEA) has approved the proposal to permit foreign airlines to make investments, up to 49 percent, in Indian carriers.

The press release from the Government of India says

The Cabinet Committee on Economic Affairs has approved the proposal of the Department of Industrial Policy and Promotion for permitting foreign airlines to make foreign investment, up to 49 percent in scheduled and non-scheduled air transport services.

Removing the existing restriction on investment by foreign airlines would assist in bringing in strategic investors into the civil aviation sector. Higher foreign investment inflows are necessary at the present juncture, in order to strengthen the sector. Introduction of global best practices, concomitant with the induction of FDI from foreign airlines, is expected to lead to higher service standards, international best practices and induction of state-of-the-art technologies, in the air transport sector.

Until now, foreign airlines were allowed to participate in the equity of companies operating cargo airlines, helicopter and seaplane services, but not in the equity of an air transport undertaking operating scheduled and non-scheduled air transport services. The Government has now permitted foreign airlines to invest, under the Government approval route, in the capital of Indian companies operating scheduled and non-scheduled air transport services, up to the limit of 49 percent of their paid up capital. The 49 percent limit will subsume FDI and FII investment. The investments so made, would need to comply with the relevant regulations of SEBI, such as the Issue of Capital and Disclosure Requirements (ICDR) Regulations / Substantial Acquisition of Shares and Takeovers (SAST) Regulations, as well as other applicable rules and regulations. Such investment would further be subject to the conditions that:

  1. A Scheduled Operator’s Permit can be granted only to a company:
    1. That is registered and has its principal place of business
      within India,
    2. The Chairman and at least two-thirds of the Directors of which
      are citizens of India, and
    3. The substantial ownership and effective control of which is
      vested in Indian nationals.
  2. All foreign nationals likely to be associated with Indian
    Scheduled and Non-Scheduled air transport services, as a result of such
    investment, shall be cleared from security view point before
    deployment, and
  3. All technical equipment that might be imported into India, as a
    result of such investment, shall require clearance from the relevant
    authority in the Ministry of Civil Aviation.

The issue of permitting FDI by foreign airlines in the equity of an air transport undertaking operating Scheduled and Non-Scheduled air transport services has been under consideration of Government for some time. There has been a need to consider financing options available for private airlines in the country, for their operations and service upgradation, and to enable them to compete with other global carriers. Denial of access to foreign capital could result in the collapse of many of our domestic airlines, creating a systemic risk for financial institutions, and a vital gap in the country’s infrastructure.

The total FDI inflows into the air transport sector, during January, 2000 – April, 2012, were US $ 434.75 million, constituting only 0.25 percent of the total FDI inflows into the country.

The three airlines most likely to benefit from this decision are Kingfisher, SpiceJet and GoAir. Jet and IndiGo may also gain. A spokesperson for Kingfisher said

“We are very pleased that the Government has decided to allow foreign Airlines to invest upto 49% in the equity of Indian scheduled Airlines. This will open up a wide range of opportunities for both Indian carriers and foreign carriers who wish to participate in the strong growth potential for Civil Aviation in our Country. Kingfisher will now be able to re-engage with prospective Airline investors in a more meaningful manner and move towards re-capitalization and ramp up of operations.”

A statement from Jet Airways said

“We welcome any policy initiated by the Government of India.”

A spokesperson from Lufthansa said the German carrier has no plans to invest in India. SpiceJet and GoAir did not issue any statement to us.

It is important to observe the FDI will not be through the automatic route. Each investment proposal with have to be ‘cleared’ by the Ministry of Civil Aviation and the Foreign Investment Promotion Board (FIPB). So one can expect at three to four months for any proposal to come through. Any guesses why this route has been chosen?

The airline that is on everyone’s lips is Kingfisher Airlines. There appear to be two possible suitors for Kingfisher. Either IAG (International Consolidated Airlines Group, S.A., the British-Spanish holding company of British Airways and Iberia). The second could be Etihad. Both of them would look to using the Kingfisher domestic network as a feeder service for their international routes ex India or ex Abu Dhabi.

The latter looks like a more likely choice. Etihad has deep pockets, has been busy investing in airlines across the world, has growth ambitions to match up with its cousin Emirates, and has significant under-utilisation of its bi-lateral rights with India.

Whoever invests in Kingfisher, will surely move Vijay Mallya out of control of the airline. At best he would be the titular figurehead, a Chairman. With the enormous debt load of the airline, and the hanging Damocles sword of corporate guarantees from his other companies, and himself personally, Dr. Mallya does not have too much room to manoeuvre.

While foreign airlines can officially invest up to 49%, it is common practice for foreign companies to buy the balance 1.01% of shares to gain a controlling interest, via an intermediary.

The rumour mill has it that Qatar Airways is in talks with SpiceJet. The unknown right now is GoAir. The airline has been quietly growing and is independently operationally profitable i.e. without income from sale and lease-back. Next week we are publishing the very interesting interview we had with GoAir CEO Giorgio De Roni.

The interesting times still continue. Stay tuned for more, and as usual comments are welcome.

About Devesh Agarwal

A electronics and automotive product management, marketing and branding expert, he was awarded a silver medal at the Lockheed Martin innovation competition 2010. He is ranked 6th on Mashable's list of aviation pros on Twitter and in addition to Bangalore Aviation, he has contributed to leading publications like Aviation Week, Conde Nast Traveller India, The Economic Times, and The Mint (a Wall Street Journal content partner). He remains a frequent flier and shares the good, the bad, and the ugly about the Indian aviation industry without fear or favour.

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