NEW DELHI: After 16 years, the government is set to again allow foreign airlines to take stakes in Indian carriers later this week. The move is expected to help ailing Indian operators like Kingfisher raise funds. More importantly, it could pave the way for joint ventures – like Tata-Singapore Airlines that was ironically nixed years ago by disallowing FDI by foreign airlines – for start-ups too.
The commerce & industry ministry on Tuesday circulated a Cabinet note seeking comments from other ministries to permit 49% FDI, and is hoping that the proposal will go through in its present form as the finance and civil aviation ministries had agreed to it earlier.
But there is a great urgency in the government with the industry ministry rushing through the second round of consultations. It is planning to send the final note to the cabinet secretariat by Wednesday, a senior government official told TOI.
The government is pushing for a quick decision on the issue given the deep distress of some of the airlines which are unable to pay salaries, statutory dues and taxes. As a result, the industry ministry gave other government agencies only a few hours to comment on its note before sending to the cabinet secretariat. “A decision is imminent,” the official said adding that the issue could be decided as early as Thursday when the Cabinet is scheduled to meet.
But not all Indian carriers may benefit from this move. “Because of their large foreign ownership, Jet and IndiGo are unlikely to be eligible for FDI from foreign airlines. Others such as Kingfisher, GoAir and SpiceJet can expect fresh funding through this route,” said Kapil Kaul, India head of the Centre for Asia Pacific Aviation.
According to Jet Airways stock exchange filing, at the end of December 2011, foreign corporate bodies held almost 80% in the airline. In case of IndiGo too, the foreign stake is close to 49%, Kaul said.
The move to ease FDI norms would also give the government the option of getting a foreign investor for AirIndiaif at some point a decision is taken to disinvest from it, he added.
Ironically, FDI was disallowed in 1996, apparently to block a move by a Tata-Singapore Airlines joint venture to acquire Air India. At that point, Naresh Goyal-owned Jet Airways had to buy back its 40% stake held equally by Gulf Air and Kuwait Airlines.
In the past five years, several attempts were made to allow foreign airlines to invest in Indian carriers as the latter were making huge losses and drowning in debt. Now, Indian carriers face an accumulated debt of $16 billion (over Rs 80,000 crore) on top of cumulative losses of $8.5 billion (over Rs 43,000 crore). But security concerns over Gulf and Chinese airlines investing in this sensitive area meant that the policy remained on hold.
In this holding period, only the proposed FDI cap kept changing. The civil aviation ministry was originally in favour of allowing only 24% FDI, but later agreed to 26% when the commerce ministry moved the note first. After Ajit Singh took over as the civil aviation minister, the ministry changed its stance and batted for 49% ceiling.
But airlines have now reached a stage where two of them – Air India and Kingfisher – face closure unless they get fresh fund infusion. While Air India is government-owned, Kingfisher chief Vijay Mallya has been making a desperate push for allowing FDI. Lenders to Kingfisher, who have an exposure of over Rs 7,000 crore, refused to give more working capital to the ailing airline. Air India and Jet also found themselves in the same situation with banks refusing fresh loans.
However, lenders stopped short of initiating further action against “non-performing asset” Kingfisher as the airline told banks that it was in the final stages of negotiations with investors and would get equity as soon as the government allowed FDI.