Analysis: Will Jetihad lop-sided deal favouring Etihad be corrected or be an eye-wash?

by Devesh Agarwal

Last week’s deferral by the Foreign Investment Promotion Board (FIPB) of the proposal of Abu Dhabi based Etihad Airways to buy a 24% stake in Jet Airways has brought to light how the middle-eastern carrier will have an equal or higher say in the functioning of Jet despite owning just 24%.

The deferral has also shed light on the lack of clarity in the government’s rules with regards to permitting foreign direct investment (FDI) by airlines in Indian carriers.

The Economic Times reports, the existing shareholders’ agreement between the two airlines is structured in a manner to give Etihad the upper hand in the decision making at Jet. Without giving Etihad any specific rights or veto power, by requiring approval of two-thirds majority of the board for even routine decisions, the agreement equates the 24% owning airline to the 51% owning promoter, Naresh Goyal.

In normal circumstances, under the Companies Act, 1956, two-third majority is only required in matters such as capitalisation and dividend declaration issues. Any joint management of an Indian company automatically invites additional regulatory scrutiny, like from the Securities and Exchange Board of India (SEBI).

Some of the aspects of the agreement that were questioned by the FIPB include

  • Re-location to Abu Dhabi and co-location of the network and revenue management functions of Jet
  • The vice chairman will be nominated by Etihad but no mention on nomination of chairman’s post
  • If Goyal ceases to be chairman, new chairman to be nominated by the board, not selected by shareholders
  • Chairman will not have a casting vote
  • Two-thirds majority approval required for appointment and removal of CEO, independent directors, and senior management, and to pass any resolution in the board meeting i.e. for routine issues, contrary to existing law

Operational control too

Operationally too, the agreement shows how Etihad is dominating its Indian ‘partner’ right from the word go. The agreement stipulates that Jet will, at its expense, re-locate and co-locate its network and revenue management operations to Abu Dhabi. In the first phase functions that will shift include, international and domestic network planning, international pricing for non-India points-of-sale, and management of joint fare filing, and inventory control of the Abu Dhabi hub routes. In the second phase, all functions will shift to Abu Dhabi, including, international revenue management, domestic scheduling and pricing, international pricing for Indian points-of-sale, and inter-line pricing.

Many legal analysts feel the Jetihad deal has been constructed in this manner to afford Etihad almost complete management and operational control of Jet, while helping the middle east carrier to avoid triggering the ‘takeover code’. The code is activated either when the investment crosses 25% of a company’s shareholding or when the investing company gains ‘control’ of the target company. It is the definition of ‘control’ as per the Companies Act which is now becoming the bone of contention in approving the deal.

All of this is hardly surprising. Jet was in dire straits when it went around looking for whoever was willing to invest, and has acceded to virtually every condition demanded of it.

Policy confusions

Another legal issue muddling the deal is the word “effective control”. The new FDI guidelines allowing for investment by foreign airlines say that ‘substantial ownership’ and ‘effective control’ should be vested with Indian nationals. There is confusion since the term ‘effective control’ has never been officially defined. The Companies Act, SEBI’s takeover code, and the overall FDI policy, have defined the word ‘control, but are silent on ‘effective control’.

To prod the Jetihad deal along, the civil aviation ministry has reportedly submitted a long list of comments to the FIPB clarifying what it means by ‘effective control’. A copy of this has been marked to the ministry of corporate affairs (MCA), the final arbiter of all matters related to company affairs.

For the Indian government, plagued by reforms policy paralysis, this is fast becoming a desperate situation. On one hand, to prove the progress of the few new policy reforms it has announced, it is bending almost every rule in the book, even going so far as to plan allowing foreigners to bypass FIPB approval for investment in the country. On the other hand the Jetihad deal is so lop-sided favouring Etihad, approving will set a bad precedent in law, allowing foreign companies to completely disregard the rights of Indian shareholders.

Jet is in a hard place. Its need for funds is desperate and no one can fault Etihad for trying the most bang for its buck. Even with the most intense lobbying, Jet and Etihad will need to re-work parts of the agreement to make it more palatable, but will this be a real change protecting all shareholders or just an eyewash to get this lop-sided agreement through the scrutiny of an equally desperate government?

Please share your thoughts on this subject via a comment.

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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