Centre relaxes FDI norms in aviation

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Mumbai: India will allow overseas entities—excluding airlines—to own 100% in domestic airlines, the government said on Monday, as it seeks greater foreign direct investment (FDI) inflows into the country.

Currently, up to 49% FDI is allowed under the automatic route in domestic airlines (scheduled air transport service/ domestic scheduled passenger airline and regional air transport service).

“It has now been decided to raise this limit to 100%, with FDI up to 49% permitted under automatic route and FDI beyond 49% through government approval. For NRIs, 100% FDI will continue to be allowed under automatic route,” the Prime Minister’s Office said in a statement.

Investment by foreign airlines in domestic airlines will, however, be limited to 49% of paid-up capital.

Currently, India has 10 airlines, including scheduled and regional airlines. They are IndiGo (run by InterGlobe Aviation Ltd), Jet Airways (India) Ltd, Air India Ltd, GoAir (Go Airlines (India) Ltd), SpiceJet Ltd, AirAsia (India) Pvt. Ltd, Vistara (Tata SIA Airlines Ltd), regional airlines Air Costa Aviation Pvt. Ltd, Air Pegasus (Decor Aviation Pvt. Ltd) and TrueJet (Turbo Megha Airways Pvt. Ltd).

Jet Airways sold a 24% stake to Etihad Airways PJSC in 2013.

Vistara, run by Tata SIA Airlines Ltd, is a joint venture between Tata Sons Ltd (51%) and Singapore Airlines Ltd (49%) while AirAsia India is a joint venture in which AirAsia Bhd holds 49% and Tata Sons 51%.

The government announced reforms for the airport sector too.

“The extant FDI policy on airports permits 100% FDI under automatic route in greenfield projects and 74% FDI in brownfield projects under automatic route. FDI beyond 74% for brownfield projects is under government route,” the statement said.

To aid in modernization of existing airports, the government decided to permit 100% FDI under the automatic route in brownfield airport projects, it said. Mumbai and Delhi airports are examples of brownfield airports while India has greenfield airports such as the ones in Bengaluru and Hyderabad.

Amber Dubey, partner and India head of the aerospace and defence practice at consulting firm KPMG, said the opening of FDI will help bring in much-needed cash, aircraft fleet and best practices.

“We may see its positive impact over the next 6-12 months. Though equity holding of foreign airlines is still limited to 49%, a foreign airline can join hands with its sovereign fund or private investors and set up a 100% foreign-owned airline in India,” Dubey said.

Dubey said the 49% restriction on ownership by a foreign airline may also abolished in due course.

“The avoidable controversies on settling ‘ownership and control’ issue is now over. Foreign airlines can now focus on the customers and competition rather than wasting time on legal and regulatory issues. The likely increase in competition will bring down prices and enhance air penetration in India – both international and domestic. Indian carriers can now look for enhanced valuations in case they wish to raise funds or go for partial or complete divestment,” Dubey said.

“The days of micro-management in aviation are gradually getting over. The government is now limiting itself to issues like aviation safety, security and consumer interests and leaving the rest to market forces,” he added.

Not all are as excited about the reforms.

“100% FDI in airlines is not incremental positive. We already have a 49% which has not been utilised. I don’t see any informed international investors taking a big stake in Indian aviation company,” K.G. Vishwanath, a partner at consulting firm Trinity Aviation Consultants Pte Ltd of Singapore and former vice-president (commercial strategy and investor relations) at Jet Airways.

“For a foreign carrier so long as they are able to participate and funnel Indian travellers to their hub abroad they will have achieved success and that may not require a 49% stake in an Indian carrier as is evident in the Etihad-Jet deal,” Vishwanath said.

He said when things are going good one may not find Indian promoters giving up too much stake and when things go bad, foreign investors may not find such investments attractive any more.

“So this announcement is not incrementally positive or negative in the short term. Going forward, if the government decides to take other measures including reducing cost of doing business like rationalisation of input costs, then incrementally this opening up of the sector may yield some positive results,” Vishwanath added.