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DIPP proposes 26 limit for investment by foreign airlines

By : Guest on 23 November 2011 E-mail Print Report Abuse

The department of industrial policy and promotion (DIPP) has recommended that overseas airlines be allowed to acquire up to 26% of domestic carriers, rejecting the aviation ministry’s contention that this be kept to 24%. The draft foreign direct investment (FDI) note is being circulated among concerned government departments for comments.


Former DIPP secretary R.P. Singh, who retired on 31 October, had said his department had received a communication in support of the lower FDI threshold, while the department supported the higher one.


India allows overseas investment of up to 49% in Indian carriers, but foreign airlines are not allowed to invest directly or indirectly in domestic ones due to security concerns. The government is amenable to lifting this restriction as domestic carriers, hit by rising fuel costs, could get a boost from overseas investment.


Earlier, media reports had said that DIPP may suggest both the 26% and 24% FDI limits and leave it to the cabinet to take a final call on the matter.


“Why should we suggest two different caps? This is our view, which we have circulated for comments. Let departments give their opinion,” said a senior DIPP official on condition of anonymity.


The official said the draft note was circulated last week. After comments are received, the note will be finalized and presented to the cabinet for approval, he said. “We usually give two weeks’ time to departments to send their opinion,” the official said.


The 24% limit was rejected as this won’t be attractive to investors, the official said. A minimum 26% stake is required to block special resolutions.


Domestic private airlines are going through a tough time with IndiGo being the only carrier that registered a profit in 2010-11. Private airlines in India have lostRs.3,500 crore in the six months ended September, more than the Rs.2,900 crore they lost in all of 2010-11, according to lobby group Federation of Indian Airlines (FIA). Kingfisher Airlines Ltd has cancelled about 50 flights daily until mid-December amid a severe cash crunch. The airline had debt of about Rs.7,000 crore at the end of the 2010-11 fiscal year.


The move could help carriers bring in desperately needed capital, said Ernest Arvai, head of US-based aviation consulting firm Arvai Inc. But this will depend on their current financial condition.


“IndiGo, who are profitable, are the likely first target,” he said. “Jet Airways (India) Ltd, changing strategy yet again, appears on the downslide, and as a result may have a more difficult time attracting foreign capital. Others such as SpiceJet could also be attractive. (Only) Kingfisher isn’t going to be attractive to anyone until (financial) restructuring.”


Kingfisher Airlines chairman Vijay Mallya recently called for investments by foreign airlines to be allowed.


“Now 100% FDI is permitted in airports... I don’t see any reason why FDI from strategic partners like an airline should be banned or not permitted. Who would understand an airline better than another airline? I hope government will consider it seriously,” Mallya said on 15 November.


To be sure, Indian carriers are divided over the issue, which is why FIA hasn’t taken a position on FDI. To be sure, Indian carriers are divided over the issue, which is why FIA


Paresh Parekh, partner (tax and regulatory services) at Ernst and Young, welcomed the move.


“Indian carriers reportedly seem to be in need of funds. So, if investment from foreign carriers is allowed, then more options for raising capital will be potentially opened for them,” he said.


Dhiraj Mathur, executive director and head of the aerospace and defence practice at PricewaterhouseCoopers, said allowing 26% investment by foreign carriers will only mean they can block special resolutions.


“They still will not have management control, being a minority shareholder. Day-to-day functioning of the domestic airline will not change,” he said.


Foreign airlines wouldn’t want to invest anything below 26%.


“They are not financial investors, they would like to be strategic partners,” Mathur said.


Parekh said 26% is a crucial level for foreign investors.


“According to the Indian Companies Act, any special resolution can be passed only with 75% or more voting power in a company. So, if a foreign carrier has 26% stake, then it can at least block any special resolutions,” he added.


Though there are concerns over airport charges, the high cost of jet fuel and taxation issues, the compelling Indian growth story makes it attractive enough for foreign airlines to invest in domestic carriers, Mathur said. “As valuations of domestic airlines are low, it is a good time for foreign airlines to enter the Indian market through strategic partners,” he said.

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