Saturday, September 15, 2012

Reforms Season Two - Part II: FDI in Indian Aviation - Falling short of expectations

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J.R.D.Tata (b. 1904, d.1993) may be smiling, after seeing the messed up Indian aviation sector and hearing government's decision allowing foreign aviation companies to invest up to 49% in Indian air transportation segment.  49 holds a symbolic value, it is exactly the same percentage of shares he ceded to GOI in 1948; GOI bought an additional 2% in 1953 and took over Tata Airlines (renamed to Indian Airlines).

However, as one columnist wrote some time back, credit for opening up Indian Aviation also goes to Vijay Mallya, who 'created a non-bail-outable airline'.

II. Permitting up to 49% investment for foreign airlines in Indian air transport services.

Until now, Foreign Airlines were not allowed to buy equity in air transport sector, even though it was allowed in Cargos etc. With current policy change they can invest up to 49% in civil aviation sector.

FDI is essential for market’s survival and growth. In this cash burning arena, we already have two non-bailoutable airlines. Government, which is already under severe financial stress because of heavy bills from Oil & Gas subsidies clearly don’t have the stomach to pump cash for an airline bailout. Even if it wants, GOI can't do it. As far as banks are considered, they are already struggling to reduce the amount of non-performing assets. The burden to find additional capital to remain BASEL complaint is already looming over their heads. So who else will invest?

Will this work?

FDI will bring best practises, higher service standards etc. But the question is, will this work? My answer is, ‘it may not’ as there are certain problems with the policy.

First of all, 49% includes both FDI as well FII (Foreign Institutional Investment). This means, even if FII investment is 0%, foreign airlines will not get majority equity and control of the board. Assume that, there are some FIIs already invested in aviation companies then foreign airlines will remain as minority shareholders.

Will they swallow this status? My answer is no, they may wait some more time, till GOI increases FDI limit to 74%. After all, why should they burn cash in India without any management control, when they are facing cash problems in home itself? If Indian government is not sure about handing over the board control, then from where the so called best practices will come?

Problematic areas

There are some other restrictions as well,

1. Scheduled Operator’s Permit can be granted only to a company,

a. That is registered and has its principal place of business within India
My Take: Reasonable expectation.

b. Security clearance for all foreign nationals coming to India as part of the deal
My Take: Reasonable expectation.

c. All technical equipment that might be imported into India, required clearance
My Take: Reasonable expectation.

d. The Chairman and at least two-thirds of the Directors of which are citizens of India
My Take: Not reasonable, still its fine.

e. The substantial ownership and effective control of which is vested in Indian nationals.
My Take: Not reasonable, still its fine. It’s like ‘Tata Group’ buying ‘Jaguar and Land Rover’, but not allowed to put their own man from Indian on the top of the board.


I think foreign companies will wait till next policy change, which may raise the cap to 74%. Without a minimum 51% and control, risks are high for them especially in markets like India where there is little appetite for high end consumer spending and Jet fuel taxed like a luxury item.  Yet, they may come because of the attractions from a growing market. The curious question is will they invest in Air India or Kingfisher? Only time can tell.

In my opinion Manmohan Singh government could have raised the cap to 74% this time itself.



1. Government of India

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