Tuesday, November 22, 2011

FDI in the Civil Aviation Sector

With the civil aviation industry in India facing concerns on the financing front, calls are being made to liberalise the foreign investment rules in the sector. Of course, that stance has been subjected to criticism on the ground that the foreign direct investment (FDI) policy should not be utilized to bail out certain players in the industry.
In any event, there are a couple of issues to be considered from an FDI standpoint. The proposal doing the rounds (although there is no formal announcement from the Government) is that foreign airlines will be permitted to hold up to 24% in Indian airline companies. The reason behind such a cap is to ensure that the foreign airline does not obtain negative control by being able to block special resolutions in the company. Given that this would be a strategic investment rather than a financial or portfolio investment, it is not clear if foreign airlines will be willing to take up such a low stake in Indian ventures. Moreover, it is likely that even if its stake is 24% or below, the foreign airline would insist on significant affirmative voting or veto rights (in addition to other customary rights granted in such types of investment), and it remains to be seen whether the regulatory proposal would also take into account the grant of such rights to foreign airlines and, if so, to what extent. 
At a broader level, the discussion of imposing a cap of 24% on foreign airlines appears to run contrary to the intention of the Department of Industrial Policy and Promotion, Government of India, to streamline foreign investment caps such that all limits below 49% would be abolished, as stated in a discussion paper issued in June this year. The current proposal in the airlines sector goes against the streamlining effort.

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