New investment guidelines throw spanner in AirAsia, Etihad works

According to the guidelines for foreign investment in the civil aviation sector, any foreign entity which invests in an Indian airline cannot have more than one-third representation on the airline's board of directors.

Sindhu Bhattacharya March 06, 2013 10:55:48 IST
New investment guidelines throw spanner in AirAsia, Etihad works

New Delhi: This could well put a spanner in the works for the Jet-Etihad equity partnership, which is already facing delays. And alter the deal contours of the proposed new airline where AirAsia will hold 49% and the remaining 51% will be with Tata Sons and Bhatias of Telstra Tradeplace.

According to the guidelines for foreign investment in the civil aviation sector, which were notified by the ministry on March 1 and made public yesterday, any foreign entity which invests in an Indian airline cannot have more than one-third representation on the airline's board of directors.

New investment guidelines throw spanner in AirAsia Etihad works

The guidelines go on to make life even tougher for the two proposed deals by adding that the foreign airline in any such arrangement cannot interfere in the management of the domestic operator. Debarka Banik/Flickr

"While the foreign investing institution/entity including foreign airlines, which seeks to hold equity in the Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline may have representation on the Board of Directors of the Company, such representation shall not exceed 1/3rd of the total," the guidelines specify.

The guidelines go on to make life even tougher for the two proposed deals by adding that the foreign airline in any such arrangement cannot interfere in the management of the domestic operator.

"Scheduled Air Transport Service/Domestic Scheduled Passenger Airline other than those who have FDI by foreign airlines shall not enter into an agreement with a foreign airline, which may give such foreign airline, the right to interfere in the management of the domestic operator."

So what does it mean for the Jet Airways-Etihad deal where the latter is believed to be initially picking up 24% stake but is looking for management control and placing its own selected employees in key management positions?

If the joint venture between Jet and Etihad were to stick to the clauses in these guidelines diligently, Etihad will never be able to get the much coveted management control of Jet's operations. How then would this deal make any sense for Etihad, which is looking towards Jet as a domestic feeder airline which will feed Indian passengers to Etihad's own global network?

In the case of the proposed new airline of Tatas, Bhatias and AirAsia, issues get even more complicated. First of all, there are already several question marks over whether the proposal will get quick, easy clearances from the Foreign Investment Promotion Board and from the Ministry of Civil Aviation to begin airline services since no airline exists now.

But even if these clearances come, how will the airline be structured when Tatas have made it clear that they will not have any operational role. If AirAsia hires Indians to key management positions in the new airline, it still creates a conflict with these guidelines since technically, it cannot have more than one-third representation on the airline's board. So these representatives need to be backed by the Tatas and the Bhatias.

In the case of both, Jet-Etihad and the new Tata-AriAsia airline, will it finally become a curious case of pussyfooting around the rule book to run successful operations?

The guidelines also make it mandatory for Home Ministry clearances for the Chief Executive Officer (CEO) and/or Chief Financial Officer (CFO) and/or Chief Operating Officer, if these posts are held by foreign nationals. Besides, any changes in the management structure and full details about the investing foreign airline must be submitted to the Government for scrutiny.

Looks like a long road ahead for foreign airlines who are eyeing a pie of the Indian skies.

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