Govt got shareholder pact in Jet-Etihad deal amended, why did it slacken in AirAsia's case?

Ever since AirAsia BhD teamed up with Indian investors to start an airline from scratch in 2013, the venture has been a target of frequent attacks from vested interests. India's airline industry is notorious for taking care of its own and hounding out new entrants. Some powerful airline promoters are known to actually influence key policy decisions, leaving the less-powerful rivals in a quandary. So when these powerful airline promoters join hands to hound out a newbie, it is really no surprise.

 Govt got shareholder pact in Jet-Etihad deal amended, why did it slacken in AirAsias case?


Now, renewed attacks on the airline have found place in media reports and even in complaints by rival airlines to aviation authorities. The allegations can be summed up thus: AirAsia India is violating a specific requirement under which the Indian government allowed foreign airlines to invest in Indian carriers in 2012.

The allegations are that the Malaysian parent exercises substantial ownership and effective control in the Indian venture even though it holds minority 49% equity stake. In AA India, Tata Sons now holds 49% while the remaining 2% is held by functional directors, both Indians.

This story in Mint newspaper on April 11 makes several allegations. It says the documents submitted by AirAsia India to the directorate general of civil aviation to secure the airline licence were—and are—still posted on the regulator’s website but the brand licence agreement of April 2013 is not part of that. It also quotes DGCA M. Sathiyavathy as saying that the regulator was not aware of any such document and would investigate it if brought to its notice. “Nobody has brought on anything to our knowledge about other agreements,” Sathiyavathy said in an interview on the sidelines of the Hyderabad air show in March. “Till now, we have no knowledge of any other agreement which are with other parties. If someone can give us the documents, we will definitely get it examined.”

In a strongly worded statement today, AirAsia BhD said today that a section of the Indian media has "grossly misreported" that the brand license agreement signed between AirAsia India and AirAsia Bhd does not uphold the primacy of Indian shareholders and their effective control of AirAsia India. "We wish to point out that Clause 5.30 of the agreement explicitly states that ‘substantial ownership and effective control of the licensee remains at all times with Indian residents’. The agreement further states that ‘the licensee shall not be obliged to undertake any act or omission which will result in a breach of the provisions of clause 5.30’.....The brand license agreement is also referenced in the original Shareholders’ Agreement among the founding shareholders of AirAsia India. The Shareholders’ Agreement was lodged immediately after execution in April 2013 with the Indian government, in full compliance with all regulations."

If there has been a violation of an Indian guideline, of course AA India needs to be pulled up. But consider, for a moment, the similarity in the allegations against the Jet-Etihad equity deal where Etihad picked up 24% stake (not even 49%). At that time too, similar allegations had been levelled about the shareholder agreement between Jet and Etihad which ostensibly gave Etihad vast powers in decision making. Mandarins of the DIPP had said that time that along with the ministry of civil aviation, they ensured that some key clauses on the agreements were changed so that Etihad did not become the de-facto controller of an Indian airline by acquiring only 24% equity stake. If this agreement was to be the bone of contention, should it not have been examined in detail by the same people in the case of AirAsia India also?

Secondly, as this piece in the Business Standard points out, there is a good reason to re-examine this provision which bars foreign airlines from taking control of Indian carriers. If we want to pursue Ease of doing Business, we must examine whether allowing foreign companies control over Indian businesses actually hams our business or takes away level playing field from Indian companies.

It is another matter that AirAsia India's own internal workings and simmering discontent between some shareholders has only provided more fodder to rivals. It is a fact worth noting that almost two years into operations, the airline is struggling for funds due to shareholder apathy and its expansion plans have been de-escalated so that it keeps in step with India's slow paced regulatory changes.

Only recently, the second Indian partner Telestra Tradeplace, has signed an agreement to exit the airline and let it be run by the Tatas along with AirAsia BhD. AA India has had more than its fair share of trouble since day one. Not only has it been fighting allegations of control by the Malaysian parent, the start of its operations was severely delayed when DGCA dusted out a small little provision, buried somewhere in the Aircraft Rules of 1937, which required any objections by the public at large to be considered before a new airline is granted a flying permit. Though the provision existed earlier too, it was never mandatory and had never been used before granting the flying permit to any other airline in India. But it was applied in the case of AA India. Since DGCA managed to delay the airline's launch by several months by insisting on bureaucratic legalese, it should have examined all relevant agreements before granting the airline a permit.

Anyway, since then, AirAsia India has had other battles to fight, Along with Vistara (the second Tata airline), AA India has taken on the powerful lobby of incumbent airlines over the 5/20 rule. This lobby group comprises IndiGo, Jet Airways, SpiceJet and GoAir and has been seeking a status quo on the 5/20 rule which bars airlines from flying overseas before 5 years of Indian operations and a fleet of 20 aircraft.

AA's Tony Fernandes has been vocal about the need to remove this antiquated rule. Is that the reason for rivals to up the ante once again?

Updated Date: Apr 15, 2016 18:21:59 IST