Jet Airways stake sale: Airline may hit substantial ownership and effective control clause
Jet Airways stake sale: The present rules allow 100 per cent foreign direct investment (FDI) into an Indian carrier but the stake ownership of foreign airlines has been capped at 49 per cent.
The stake sale process for the grounded Jet Airways could hit the "substantial ownership and effective control" clause of the official civil aviation rules (CAR) and cast a shadow on public sector banks` (PSBs) efforts to fully recover their dues from the debt-laden airline, according to analysts. "Now, if Etihad teams up with foreign private equity firms or fund houses it will have to ensure that effective control of airline still rests in Indian hands. This will be difficult. Clarity is needed on this," an aviation policy expert said.
The present rules allow 100 per cent foreign direct investment (FDI) into an Indian carrier but the stake ownership of foreign airlines has been capped at 49 per cent. Besides, the investors have to also comply with the clause of substantial ownership and effective control (SOEC).
Air Asia India, a joint venture of Tata Sons and Malaysian carrier Air Asia, had come under scrutiny for alleged violation of the SOEC clause and had to fight legal battles to prove its Indian control.
Qatar Airways was once keen to set up a local unit in India but could not do so due to the restrictive FDI rules.
Opening a floodgate for FDI across various sectors, the Modi government had in 2016 allowed foreign investors to pick up 100 per cent equity stake in Indian carriers but retained the cap of 49 per cent for foreign airlines. It also continued with the SOEC provision for issuing a flying permit to an airline.
"There is FDI cap of 49 per cent for foreign airlines so Etihad ownership can not breach that. Secondly, substantial ownership and effective control should be in the hands of Indian entities.
"Further, the majority of members of the Board have to be Indian citizens. So, it would be critical for foreign companies to comply with but apparently not difficult to maintain," a former Civil Aviation Secretary said.
"This issue would be there. But I think DGCA (Directorate General of Civil Aviation) will have to rule on it as it did in case of Air Asia India," he added.
PwC India partner Dhiraj Mathur said that the issue of SOEC may come up in the Jet case.
Private equity firm TPG Capital, Indigo Partners, National Investment and Infrastructure Fund (NIIF) and Etihad Airways are in the race to buy a stake in the grounded Jet Airways.
Watch this Zee Business Video
The lenders consortium of Jet Airways led by state-run State Bank of India (SBI) is currently in the process of selling the airline to recover their dues of over Rs 8,400 crore. SBI Caps, the merchant banking arm of SBI, is currently shortlisting the investors for submitting their financial proposal by April-end.
Get Latest Business News, Stock Market Updates and Videos; Check your tax outgo through Income Tax Calculator and save money through our Personal Finance coverage. Check Business Breaking News Live on Zee Business Twitter and Facebook. Subscribe on YouTube.