Foreign Direct Investment - Indian Civil Aviation Sector

by Parvati Parkkot, B.A., LL.B. (Hons.), 2009 JGLS

The civil aviation sector has benefitted economies and communities around the world. By providing connectivity, it enables the growth of economies, tourism, social development, as well as access to markets on a global platform. This sector is solely responsible for 56.6 million jobs and over USD2.2 trillion of global Gross Domestic Product (“GDP”). Currently, the Indian civil aviation sector (“Indian Sector or Sector”) is the 9^th largest aviation market. Presently, around 85 international airlines and 5 Indian airlines cater to the needs that arise from the Indian Sector. According to studies, India is likely to become the 3^rd largest aviation market by the year 2020. It is predicted that the “Indian Sector will cater to 336 million domestic and 85 million international passengers with projected investment to the tune of USD120 billion”.

The fast expansion of the Indian Sector can be attributed to the economic reforms and the progressive liberalization of the Foreign Direct Investment policy (“FDI policy”) pertaining this Sector. The FDI policy regulates any foreign direct investment made in India. As per the circular issued by the Department of Industrial Policy and Promotion (“DIPP”) in 2012, amending the Consolidated FDI policy of 2012, a foreign airline is permitted to invest up to 49% in the paid-up capital of Indian companies operating scheduled and non-scheduled air transport services through the Government approval route (“Amendment”). This Amendment has triggered a series of investment by foreign airlines into the Indian Sector.

The Amendment was approved by the cabinet due to the dire need of equity infusion into Indian airlines that were going through a severe lack of funds, needed for its operations. All key players in the Indian Sector welcomed the Amendment permitting investments by foreign airlines, because of the multifaceted crisis that the Indian Sector is currently suffering due to the increase in taxes on jet fuel, rise in airport fees, unaffordable loans, lack of infrastructure and aggressive competition. It was predicted that this Amendment in the policy would give a boost to the Indian Sector that was hit by a bane of financial struggles. The opening up of the Indian Sector to investments by foreign airlines has led to an influx in foreign investment, as discussed further in this article.

FDI Policy on Civil Aviation

The FDI Policy contains various provisions for the procedure to make investments in India and also provides the maximum limit of investments.

• Present FDI Policy pertaining to the Indian Sector
• The Amendment issued by DIPP permits foreign airlines to invest up to 49% in the paid-up capital of an Indian company operating scheduled and non-scheduled air transport services on the following conditions.
• It has to be made under the Government Approval Route
• The 49% limit will include FDI and Foreign Institutional Investor investment.
• Investments made must be in accordance with the relevant regulations of the Securities and Exchange Board of India, such as the Issue of Capital and Disclosure Requirements Regulations, the Substantial Acquisition of Shares and Takeovers Regulations, and any other applicable rules and regulations
• A Scheduled Operator’s Permit will only be granted to a company that is (a) registered and has its principal place of business within India, (b) whose Chairman and at least two-thirds of the directors are citizens of India, and (c) the substantial ownership and effective control of which is vested in Indian nationals.
• All foreign nationals that are likely to be associated with a company engaging in air transport as a result of such investment must be cleared from a security aspect prior to his/her deployment.
• Clearance from the relevant authority in the Ministry of Civil Aviation must be obtained for importing any technical equipment into India as a result of such investment.
• Implications of Amendment in FDI Policy.
• This relaxation in the FDI policy allows influx of equity into the Indian Sector but at the same time ensures that majority ownership of the airline company remains in the hands of Indian citizens.
• Indian companies are allowed to invest in more than one Joint Venture (“JV”) with international players, as is evident from the fact that Tata Sons have been permitted to set up a low-cost carrier with Air Asia and a full-service carrier with Singapore Airlines.
• FDI allows international players to tap into India’s quota of seats to any destination as determined by the bilateral agreement between India and that country.

Financial Arrangements to Facilitate Entry of Foreign Investors into the Indian Sector

One of the main reasons behind the success of the Indian Sector is the various business partnerships between independent airline companies. This has made the Sector highly consumer-friendly by becoming more accessible and more efficient.  Cooperation between airlines has led to “greater choice, lower fare and improved service quality”. Financial arrangements between airlines provide for co-operation between airlines.

• Strategic Alliances. Foreign Airlines can enter into strategic alliances with Indian airlines by investing in the equity of the Indian airlines. An example is the Jet-Etihad deal, discussed further in this article.
• Mergers. Under this arrangement, two or more airlines combine in order to form a new airline. Until the passing of the Companies Act, 2013 this method was not a commonly adopted method as the Companies Act, 1956 permitted a foreign company to merge into an Indian company, but the vice versa was not permissible.
• Joint Venture with Indian Company. Under this arrangement, a separate business entity is formed which is jointly owned by a foreign airline and at least one of the Indian companies which operates scheduled and non-scheduled air transport services. This can be done in a two-way JV where a foreign airline will hold at most 49% of equity of the joint venture and the Indian airline will hold the remaining stake, or a three-way joint venture where the foreign airline will hold at most 49% of equity of the joint venture while the remaining two Indian owners of the joint venture hold the remaining stake of equity.

Drawbacks of Investing in India

One of the biggest concerns while investing in India is the rampant presence of corruption amongst government officials and the requirement of lengthy procedural approvals from various Government officials. Moreover the increasing budget deficit, and slow growth rate of India’s GDP are major causes of worry for foreign investors. India is infamous for its uncertain political climate and because of this there is a concern of unwarranted changes in policy if a different party comes to power. Despite these drawbacks the three deals discussed in the next section are a testament to the optimism that the Amendment will stand the test of time.

Major Deals in the Civil Aviation Sector

Following the Amendment, several significant deals have taken place in the Indian Sector. This has helped give the Indian Sector a new lease on life. Three major deals that have been approved by the Government are the (a) Jet-Etihad deal, (b) the three-way JV between Tata Sons, Air Asia and Telestra, and (c) the two-way JV between Tata Sons and Singapore Airlines.

Strategic Alliance between Jet Airways and Etihad Airways.

Etihad Airways, an Abu Dhabi based airline, picked up 24% stake in Jet Airways for INR 2058 crores. Naresh Goyal, a non-resident Indian (“NRI”), will hold a 51% stake in the airline, in part through his holding company, Tailwinds, registered in the Isle of Man, while the remaining 25% will be publicly held. DIPP ruled that Mr. Goyal’s personal shares will not be treated as an FDI despite his NRI status, however he needs to restructure the holding pattern to ensure that the shares held by Tailwinds and Etihad do not exceed 49% of the total number of shares.

Joint Venture between Air Asia, Tata Sons and Teletra Tradespace.

Air Asia entered into a JV with Tata Sons and Telestra Tradespace. While Air Asia will hold 49% of the shares, Tata Sons and Telestra will hold 31% and 20% shares respectively. Air Asia has invested INR 81 crores in the JV. The new company, called Air Asia India, will be a low-cost domestic carrier.

Joint Venture between Tata Sons and Singapore Airlines.

The Foreign Investment Promotion Board cleared a JV between Tata Sons and Singapore Airlines. Singapore Airlines is investing USD 49 million and will have a 49% stake in the venture, with Tata Sons holding the rest.