Foreign Direct Investment in Aviation Proposal Approved by CCEA

India’s Cabinet Committee for Economic Affairs (CCEA) has approved a proposal to permit foreign airlines to invest in Indian carriers. Foreign carriers would be permitted, by the new rules, to own upto 49% of an Indian carrier. The proposal still has to be passed by parliament, but CCEA approval is a major step forward. Under current regulation, foreign entities can own upto 49% of the Airlines of India, but foreign airlines are specifically excluded.
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.

Kingfisher Airlines has been waiting for months on this decision. They believe that a foreign carrier will be willing to invest. A Kingfisher spokesperson 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.”

This statement is very idealistic in my view – with the amount of debt which Kingfisher has accumulated, the tarnished brand image, and the poor and disorganized state of affairs, it would seem that starting a new carrier would be a better move than trying to turn this failing carrier around.

As Devesh Agarwal at Bangalore Aviation pointed out,

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?

This decision will mean that the process for foreign investment will stretch on even longer. It appears unlikely that Kingfisher will be able to continue holding out, so it looks like this decision is targeting the carrier. No doubt the lobbyists of competing carriers want one less competitor to worry about.