Focus on aviation foreign investment in India after Jet-Etihad deal

The civil aviation industry is a barometer of prevailing economic sentiment. A disproportionately visible subset of this industry is the airline segment, whose glamour is also a matter of national pride in India. However, the flight path of India’s civil aviation industry has been turbulent.

Notwithstanding its reputation as a wealth destroyer, the carrier segment has witnessed extraordinary growth in India and become one of the largest aviation markets. Indian carriers depend on the external business environment but are also greatly impacted by the government’s policy environment. Policy directives notifying changes in FDI regulations in this industry follow in sync:

1. the Department of Industrial Policy and Promotion (DIPP) and Ministry of Commerce herald policy change; and
2. in deference to DIPP policy, the Directorate General of Civil Aviation (DGCA) and Ministry of Civil Aviation amend foreign equity participation guidelines.

   The FDI regime for the civil aviation sector has been progressively liberalised. For this article, we limit examination to air transport/passenger airlines (Indian carriers). In June 2008, FDI up to 49% was allowed under the “automatic route” subject to some significant restrictions, i.e. only foreign financial institutions were permitted to invest in Indian carriers. Foreign airlines were explicitly prohibited from having:

   1. a shareholding interest or management tie-up in Indian carriers; and
   2. loan arrangements with Indian carriers, except for marketing arrangements like ground handling, code-sharing, etc.

Usually financial investors investing in distressed assets have taken chances on Indian carriers. But then not so surprisingly, international carriers have shown an incredible surge of interest in acquiring a strategic stake in Indian carriers. Here we get introduced to another game changer – bilateral air services agreements (ASAs) that two nations sign to allow international air services.

The Ministry of Civil Aviation negotiates ASAs. Since ASAs influence the volume of air services between two nations, they have an incredible impact on strategic collaborations. ASAs also overtly signify warming of bilateral trade relations between two nations. Hence, the overall policy impact purportedly travels much beyond the civil aviation sector.

With the backdrop of FDI regulations and ASAs, the Jet-Etihad deal makes an interesting case study. On 2 September 2012 the DIPP allowed foreign airlines to acquire up to 49% in Indian carriers. Events thereafter have attracted a lot of scrutiny.

On 1 March 2013 the DGCA issued operational guidelines for FDI and removed policy obstacles preventing foreign airlines from buying a strategic interest in Indian carriers. On 24 April 2013, the Ministry of Civil Aviation revised an ASA with the UAE and enhanced seat capacity and code-sharing between the designated airlines of both nations. The purported objective was to promote Indian and international connectivity.

Strategic deal

Curiously enough, on the same day, Jet and Etihad announced an ambitious strategic deal whereby Jet Airways would issue 24% in share capital to Etihad for US$380 million. Coincidentally, the 24% acquisition would also ensure that the deal flies below the radar of the Securities and Exchange Board of India (SEBI) for making a public offer. The other highlights: (i) a US$150 million investment in Jet’s loyalty programme; (ii) US$70 million to purchase Jet’s slots at Heathrow under a sale and lease-back agreement; (iii) co-operation on fuel purchase, training and maintenance.

The policy change, followed by an overnight strategic deal, invited allegations that India’s national interest was compromised in order to benefit a particular Indian carrier. Given this industry’s oligopolistic nature, such allegations can often be convincing. Since Etihad agreed to pay a 32% premium over market price of Jet’s shares, questions were raised as to why Etihad would buy into a debt-ridden company. Unless, of course, the government engineered this through an ASA overhaul! But given the present government’s unenviable record in ministerial policy making, this theory also attracted criticism. Since this strategic deal was subject to approval, it came up before the Foreign Investment Promotion Board (FIPB) and also the Cabinet Committee on Economic Affairs (CCEA) for scrutiny.

In July 2013, the FIPB approved the deal subject to: (i) Jet shall seek FIPB approval before making changes to the shareholders’ agreement with Etihad; (ii) shareholder disputes shall be adjudicated under Indian laws; (iii) articles of association of Jet shall be submitted for approval to the CCEA. Also, prior to submission before the FIPB: (i) Etihad’s board representation was reduced to two from three; (ii) Naresh Goyal, the chairman of Jet Airways, was given “casting vote on any matter”; and (iii) an earlier proposal of shifting revenue management to Abu Dhabi was dropped.

In October 2013, after studying the revised structure, the SEBI conveyed that the deal would not trigger “change in control” provisions, consequently absolving Etihad from making an open offer to public shareholders of Jet. It is notable that the SEBI did advise Naresh Goyal to divest a 6% stake before allotting shares to Etihad, in the interest of corporate governance.

On 4 October 2013, the CCEA approved the deal, stating that Jet and Etihad had complied with regulations relating to “ownership and effective control” issues.

On 12 November 2013, the Competition Commission of India (CCI) also approved the deal, stating that the proposed combination was not likely to have an “appreciable adverse effect on competition”. The CCI, though, significantly observed that the governance structure envisaged in the commercial co-operation agreement did establish “joint control” over Jet, more importantly its operations and assets.

Supreme Court hearings

Meanwhile, India’s Supreme Court admitted a public interest litigation (PIL) and began hearings. The PIL was on grounds that the ASA was devised to facilitate only this deal and would cause losses to Air India, the national carrier. Later it was also reported that the CCI had rejected Jet-Etihad’s plea to rectify that part of the CCI’s order which observes that: (i) with a 24% stake and the right to nominate two directors, Etihad has “significant” ability to participate in the management of Jet; and (ii) Etihad has effective “joint control” over Jet. In consequence, the SEBI also clarified its stance, stating that if the CCI has raised an issue, the SEBI may also reconsider its order. The SEBI has already started its preliminary work for reopening the matter.

Time will tell how this deal influences the course of strategic tie-ups between international and Indian carriers, but the blemish on FDI reforms cannot be denied. The opening of the India-UAE ASA just hours before Jet-Etihad deal was announced creates a negative perception of how the aviation sector is managed in India.

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