Jet plan to mop up funds slows over OCB stake

The cash crunch imposed by restrictive government policies is hurting the domestic airline sector, despite the Indian economy beginning to accelerate again in 2010-11. Among the country?s three largest airlines, Jet Airways is best-placed to raise capital both from the international market and from within India, but has to contend with a foreign investment cap of 49% for the civil aviation sector.

A policy mismatch has ensured that Jet Airways, despite having the largest fleet strength among the three airlines, has an equity structure out of whack with sectoral rules. It was born from an ?overseas corporate body? (OCB) Tail Winds in the early nineties, but a mid-stream policy restriction in 2003 hit the company?s plans. Foreign investment policy was changed in the wake of the stock scam, designating OCBs as foreign entities despite being majority held by non-resident Indians. Jet?s equity structure, therefore, soared overnight making it a ?foreign-owned? airline.

Jet?s board cleared a proposal to raise around $400 million. But any issue of depository receipts or foreign currency convertible bonds will breach the 49% cap. In fact, Jet is working out means to offload its foreign holding to domestic investors to comply with the norms.

The airline?s low capital base could impact its plan to expand its routes fast. Last December, the civil aviation ministry had said the foreign holding in the company was in violation of prevailing foreign direct investment (FDI) guidelines for air transport sector and asked the company to comply with the law in three years.

?We were asked by the Foreign Investment Promotion Board (FIPB) to give our views+ on the airline?s proposal to raise funds through qualified institutional placements (QIP). We told them the airline was already breaching the FDI guideline and it needed to bring its foreign holding within the sectoral cap of 49%,? a civil aviation ministry official said.

At the FIPB meeting, the representatives from the finance ministry did not object to the proposal, the official added.

Jet Airways did not respond to an email query.

Tail Winds, incorporated in Isle of Man, now holds 79.9% stake in Jet Airways. While the government earlier allowed OCBs to control companies in India, a Reserve Bank of India (RBI) circular in September 2003 derecognised such entities as ?investor class?, thus treating their holdings as foreign investment.

?The only way Jet can raise funds overseas is by transferring the OCBs? holding to Naresh Goyal, who is an NRI, who in turn can be treated as a domestic investor. The airline can also issue shares to domestic investors to reduce foreign holding and get fresh capital,? said KPMG executive director Naresh Makhijani.

Bhasin & Co managing partner Lalit Bhasin, however, said the government is within its rights to ask the airline to reduce foreign holding and comply with the changed norm.

?FDI guidelines can be revised periodically and companies have to comply with them. This is happening not only in aviation. Earlier, when the government changed the guidelines for foreign airlines barring them from holding stakes in Indian carriers, Kuwait Airways and Gulf Air had to sell their 20% stakes each in Tail Winds,? Bhasin told FE.

Jet Airways has sought an exemption from the rider put by the government on the ground that RBI had, in 2007, given its no-objection certificate (NOC) to the airline to issue shares to Tail Winds as the company planned a rights issue then to raise funds.

?The company’s position is not without basis. Due to changes in law, situations like this are generally grandfathered,? partner of a leading consultancy firm said on conditions of anonymity.

Several domestic investors FE spoke to suggested alternatives before Jet to raise funds abroad without breaching the sectoral cap.

?The airline can issue fresh equity to the domestic investors which would bring the required cash to the company. It would also place the airline in a comfortable debt-equity ratio, thus increasing its ability to raise debt. In case Naresh Goyal opts for buying the OCB’s shares, the cash would go to his NRI account and not to Jet Airways,? Taurus Mutual Fund managing director RK Gupta said.

When the RBI announced that investment of OCBs in Indian entities will be considered foreign investment, several Indian companies diluted shares to domestic investors to comply with the new guidelines. SpiceJet promoter Bhulo Kansagra who controlled the airline with nearly 60% stake bought part of the shares from the OCB as an NRI and diluted the remaining to the public and co-Indian promoter Ajay Singh.

?Kansagra then held close to 8 crore shares in SpiceJet through an OCB called Royal Holdings. After the RBI said the OCB will be treated as foreign, he sold 2 crore shares in the market with another 2 crore to his NRI account and nearly 1 crore shares to Ajay Singh. By doing this, he brought the foreign investment in the company to 30%,? an executive of a private airline said. Some industry watchers said Jet Airways can go for its asset monetisation as a temporary measure to raise funds.

?They could get some cash by monetising their aircraft. Jet is in a far better position now compared to last year when it was mulling to raise capital from foreign investors,? aviation consulting firm Centre for Asia Pacific Aviation (CAPA) India head Kapil Kaul said.

Amit Jain, partner (corporate restructuring) at BMR Advisors said the airline can raise funds by issuing commercial paper.

?Given the current structure, the company could look at compulsory convertible debentures (CCDs). There are other short-term instruments if the objective is to raise money,? Jain said.