No driver’s seat to foreign carriers
Effective operational control of airlines will remain in Indian hands
The Union civil aviation ministry is rethinking its proposal to completely dilute a clause in Aircraft Rule, 1937 that allows only Indian nationals to hold majority share and control their airlines.
The revaluation comes amidst vehement opposition from leading domestic carriers and the growing realisation that even most liberal nations like the US are averse to allowing foreigners take the drivers seat.
It is vetting options that would ensure effective operational control in Indian hands in spite of foreign firms holding 100 per cent equity stake in the airline.
Since the ministry has already floated the proposal to water down the existing FDI guidelines by removing 'substantial ownership and effective control' clause and other requirements, the ministry would not retract completely, but choose a path that would please all.
"The gazette notified on December 1 says that airline licensing would now require the operator to have their 'principal place of business within India'.
It has removed the clauses related to control and substantial ownership. But given the sensitivity of aviation, it is very important that control of an airline vests in Indian hands. For this, the 'substantial ownership and effective control' clause could be split," sources said.
Notwithstanding the extent of stake held by foreign companies in Indian joint ventures or fully owned subsidiaries operating out of India, the fresh round of discussions are revolving around the idea of retaining effective control clause.
If this proposal finds favour with the prime minister's office (PMO), foreign companies or airlines entering Indian aviation passenger services may not be allowed to control operations from outside.
The civil aviation ministry had proposed to dilute the FDI rules to bring it in sync with the government's decision to allow 100 per cent FDI in Indian carriers.
The move was aimed at tempting foreign investors, especially those based out of the Gulf and West Asia, to pump their money into Indian aviation.
It was also intended to infuse funds and support a sector, which continues to be one of the fastest growing. It recently overtook Japan in air traffic numbers, becoming the third largest aviation market in the world.
The Modi government, which has been bullish on foreign fund flows in the last three years, hopes that fresh funds in the aviation sector would hasten the pace of India taking pole position globally.
Top private carriers IndiGo, SpiceJet, Jet Airways and GoAir, however, are not convinced and have thrown their combined weight behind the opposition to oppose the proposal to wide open the sector for foreign investors.
They have maintained that most airlines are profitable and sustain their fleet and network expansion in coming years. They have also argued that aviation rules are set on the basis of reciprocity and therefore India should not unilaterally relax all the rules that protest domestic industry.
“We are ready to allow carriers from Gulf and West Asia to take management control and ownership in Indian carriers. But are we getting the same rights in their countries? Today, if one of the Indian carriers plans to own a carrier in Dubai, will the Dubai authorities allow it, asked an airline executive, wishing not to be named.
He cited the case of Virgin America to drive home the point that even the US, one of the most liberal countries in the world, does not welcome foreign airlines to take complete control in their carriers.
On concerns of some of the American investors recalling their investment from Virgin America, part of Richard Branson's Virgin Group, rival Alaska Airlines had in 2009 requested US authorities to determine if the effective control in the airline rested in the US nationals. The US allows foreign airlines to own up 25 per cent equity stake in domestic carriers. It may be noted that the US transport authorities had cleared Virgin America's proposal to operate in the US only after tick-marking all of their plans against the US compliance rules including that of management control.
India too has been extra vigilant about FDI by foreign airlines in Indian carriers. After years of blanket ban, the then UPA-II government in 2012 eased the rules allowing up to 49 per cent equity investment by foreign airlines.
This saw the entry of Etihad, Singapore Airlines and Air Asia into the Indian market. While Etihad picked up 24 per cent in Jet Airways, the Malaysian carrier Air Asia and Singapore Airlines set up brand new airlines in partnership with the Tata Group. Opening the floodgates for foreign funds, the NDA government led by Narendra Modi in 2015 opened most of the sectors for FDI, including defence and aviation.
Now a foreign company can invest up to 100 per cent in an Indian airline. While it can do so, there are certain conditions, one of them being substantial ownership and effective control' clause, that some experts have termed as irritants in the way of foreign funds into the sector.
To be sure, the upper limit of FDI for airlines is 49 per cent. Companies other than airlines are, however, allowed to pick up 100 per cent stake in Indian carriers. In order to address this, the aviation ministry last December proposed to dilute these conditions. Accordingly, it proposed a liberal licensing condition for starting a new airline or investing in existing ones.
The new rules require at least one-third of airline's directors to be citizens of India, as against one of the posts of chairman or managing director or CEO being held by an Indian. This is far more liberal given that current guidelines require the chairman and at least two-thirds of airline directors to be Indian citizens.
Nirbhay Kumar