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The partnership between AirAsia, the Tatas and the Arun Bhatia family is set to be a long-term one. The three-way joint venture agreement to run low-fare air services in India will bind all the entities under an exclusivity clause that bars them from relinquishing their shareholding to any other entity including forging an alliance with a domestic airline company during the term of the joint venture.
However, the terms of the agreement allows Tata Sons and the Bhatias-owned Telestra Tradeplace freedom to pick up 5% equity capital of any airline if the investments are made jointly without getting any management control in the target company.
“During the term of this Memorandum of Agreement, AirAsia Berhad, AirAsia India Ltd and their affiliates shall not directly or indirectly initiate, assist, solicit, negotiate or accept any offer or inquiry from any person regarding an investment, partnership, participation, association, brand licensing with any person in India engaged in the business,” the exclusivity clause in the memorandum of agreement, as reviewed by FE, states.
The arrangement helps provide more permanence to the joint venture agreement and ensures commitment of each partner in it. This is likely to help sustain operations in the country's volatile aviation market.
Experts say the stability in the partnership will send the right signals to the market and also help in future fund-raising plans.
“AirAsia and the Tatas are well-known brands and this show of commitment will help them whenever they seek to raise loans,” said Peter S Morrell, a professor at Cranfield University and author of the book Airline Finance. “In a market where banks and lessors have become wary to provide funding, such an exclusivity clause will give potential lenders confidence.”
Consultants also said that in such major deals an initial lock-in period is typical. “When two major groups are coming together, there tends to be an initial lock-in period,” said an investment banking consultant. “Stability is essential to start off such joint ventures.”