Tatas' move to gain management control in AirAsia India may raise questions

New Delhi: If Tata Sons does buy out the 21 percent stake of joint venture partner Telestra Tradeplace’s stake in AirAsia India, it will become the only Indian owner to have majority 51 percent stake - and therefore management control - in two separate airline ventures in this country. It already holds 51 percent stake in Vistara which is a joint venture with Singapore Airlines. Is this move of acquiring majority in AirAsia India going to spell trouble for a group which has been passionate about the aviation business for decades but was thwarted twice, before finally succeeding in running two airlines with foreign partners in India last year? At the very least, Tatas’ move could raise some questions, pertinent ones.[caption id=“attachment_2036191” align=“alignleft” width=“380”] An AirAsia aircraft. Reuters[/caption] According to multiple sources, Tata Sons may be already in discussions with Telestra Tradeplace’s Arun Bhatia for buying out much or all of his 21 percent stake in AirAsia India at undisclosed valuations. These sources point out that the Tatas do not want their “philosophy” to be diluted in a scenario where Bhatia seeks out other buyers of his stake. So Tata Sons would be keen to buy him out instead and take up its total shareholding in AA India to majority 51 percent. “Indian aviation is a sunrise sector. Why should the Tatas not be buying out Telestra’s stake if negotiations conclude satisfactorily? It will make eminent sense. Some negotiations have happened but it is too early to conclude that a stake sale is happening,” a person close to developments said. A Tata Sons’ spokesperson merely said whenever he has any information to share, “We will inform you.” But questions remain: 1) Why did the Tatas not pick up 51 percent stake at the time of formation of AirAsia India itself? Since this JV was formed before any discussions had been finalised with SIA for a second airline venture in India, the Tatas were free to acquire majority in AirAsia India. A source said at that time, the Tatas were keen to only make a passive investment in an airline venture. Specially, because they were wary after the earlier fiascos and the government had just relaxed the ban over foreign airlines’ investment in Indian counterparts. So Telestra was brought in to comply with the FDI limits which bar any foreign airlines from holding majority equity so that the total Indian stake remained at 51 percent, split between Tata Sons (30 percent) and Telestra (21 percent). Now, with the prospects of aviation sector improving, the Tatas obviously want to gain management control in this venture. 2) Does Tata Sons not have the right of first refusal in case Telestra’s Bhatia wants to exit? There is no clarity on this point though sources say the clause could be ROFR but non-binding. 3) Why is Telestra keen on selling out, specially when sources we quoted earlier insist that it may not get anything significantly more than what it invested when AirAsia India was incorporated? In mid-2013, Bhatia had publicly stated he was disappointed with the Tatas for not keeping him in the loop while investing in a second airline, Vistara. Also, there have been hints all along that Telestra was brought into the three way JV (AA India is 49 percent owned by AirAsia BhD) at the recommendation of AA’s Tony Fernandes. 4) In case the buyout happens, the Tatas may have to face some queries by the Competition Commission since it will then be majority owner in two airlines operating in domestic and overseas markets from India. A source said CCI queries will not be relevant given the market share of the two airlines and inability to prove any market dominance. Besides, AirAsia India is a low-cost carrier whereas Vistara is a full service airline so their areas of operation are distinct. Besides these questions, at least one impending policy decision may also affect any move by the Tatas to gain control of AirAsia India. The government has been dragging its feet on replacing the antiquated 5/20 rule and incumbent airlines have already ganged up against the two Tata airlines (Vistara and AirAsia India). This rule bars domestic airlines from flying abroad unless they have a fleet of 20 aircraft and have flown domestic for five years. Under the aegis of Federation of Indian Airlines (FIA), the incumbents have been lobbying hard, saying the 5/20 rule should not be abolished since this will only help the two Tata airlines. They have also been pushing for implementation of a proposal which links overseas flying rights to vast domestic linkages. The Tatas would do well to await the government’s final decision on 5/20 before effecting any changes in the shareholding of AirAsia India to avoid further mud slinging by the incumbents. One of the sources quoted earlier said any decision on Telestra’s stake in AirAsia India would likely be taken only after there is clarity on 5/20.