FDI in aviation sector: Flying high or lying low?

By Gautam Khaitan and Prarabdha R Jaipuriar, OP Khaitan & Co
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On 3 January, Jet Airways issued a statement to stock exchanges confirming news reports that it was in talks with Abu Dhabi’s Etihad Airways for a potential investment. These discussions, it stated, had commenced recently and there could not, at this stage, be a firm time line as to their progress, considering the complexity of such transnational transactions and the legal requirements of the regulatory structure.

Gautam Khaitan
Gautam Khaitan

The talks follow the liberalization of India’s foreign direct investment (FDI) policy in the air transport services segment of the civil aviation sector, outlined in Press Note 6 (2012 Series), dated 20 September 2012.

Earlier, the June 2012 report of the civil aviation sector working group to the National Transport Development Policy Committee noted that permitting strategic investment by airlines registered overseas could bring significant benefits for the country.

Three segments

For the purpose of FDI policy, the civil aviation sector has been broadly classified in three segments: airports, air transport services and other services. The key features of the policy for these three segments are summarized below.

Airports: For greenfield airport projects, 100% FDI is allowed under the automatic route. For existing airports, 100% FDI is allowed, out of which investment up to 74% may be under the automatic route and rest under the approval route.

Air transport services: For scheduled air transport services and domestic scheduled passenger airlines, 49% FDI is allowed under the automatic route. For non-resident Indian (NRI) investors, the limit is 100%. A foreign airline is required to invest under the approval route and the limit of 49% includes foreign institutional investment (FII) as well as FDI.

For non-scheduled air transport services including cargo airlines, 49% FDI is allowed under the automatic route. FDI beyond 49% and up to 74% is permitted under the approval route. For NRI investors, the limit is 100%. Foreign airlines are permitted to invest in cargo airlines as per these limits and entry routes. Where a foreign airline invests in non-scheduled air transport services other than cargo airlines, it is required to invest under the approval route and the limit of 49% foreign investment (FDI and FII) would be applicable.

For helicopter services and seaplane services, 100% FDI is allowed under the automatic route. Foreign airlines are also permitted to invest.

Any foreign investment in a listed airline company would need to comply with capital market regulations such as the Issue of Capital and Disclosure Requirements Regulations and Substantial Acquisition of Shares and Takeovers Regulations, as well as other applicable rules and regulations.

Prarabdha R Jaipuriar
Prarabdha R Jaipuriar

A scheduled operator’s permit can be granted only to a company: (a) that is registered and has its principal place of business within India; (b) the chairman and at least two-thirds of the directors of which are citizens of India; and (c) the substantial ownership and effective control of which is vested in Indian nationals.

All foreign nationals likely to be associated with Indian scheduled and non-scheduled air transport services as a result of investment by a foreign airline must obtain security clearance before deployment.

All technical equipment to be imported into India as a result of investment by a foreign airline in Indian scheduled or non-scheduled air transport services requires clearance from the relevant authority in the Ministry of Civil Aviation.

Other services: For ground handling (both ramp handling and traffic handling) services, subject to sectoral regulations and security clearance, FDI is permitted up to 49% under the automatic route and beyond 49% up to 74% under the approval route. For NRI investors, 100% FDI is permitted.

For maintenance and repair organizations, flying training institutes and technical training institutions, 100% FDI is allowed under the automatic route.

For courier services for packages, parcels and other items which do not come within the ambit of the Indian Post Office Act, 1898, or activity relating to the distribution of letters, 100% FDI is allowed under the approval route.

What lies ahead

It is noteworthy that a foreign airline investing in an Indian carrier would be required to wade through numerous regulatory approval processes, involving the Ministry of Civil Aviation, Directorate General of Civil Aviation, Foreign Investment Promotion Board, Securities and Exchange Board of India, and Reserve Bank of India. On top of that, any expat personnel sought to be deployed by the airline must obtain security clearance.

As Indian carriers, such as Kingfisher Airlines, are coping with grounding of fleet, debt crisis, disputes with staff, tax issues and high costs, foreign airlines are treading cautiously before lapping up the opportunity to enter India’s aviation sector. Sound due diligence and careful structuring would, therefore, be at the core of any investment in this sector.

OP Khaitan & Co is a 40-lawyer law firm, based in New Delhi. Gautam Khaitan is the firm’s managing partner and Prarabdha R Jaipuriar is a senior associate.

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