India's first foreign direct investment (FDI) of close to R2,060 crore or nearly $350 million in the civil aviation space is close to taking off. On Monday, the Foreign Investment Promotion Board (FIPB) allowed Jet Airways, India’s second-largest airline by market share, to sell 24% stake to the Abu Dhabi-based Etihad Airways, albeit with certain riders. As insisted on by the Securities and Exchange Board of India (Sebi), Naresh Goyal will remain executive chairman and has the right to cast the final vote on all matters.
Last September, the government had allowed foreign airlines to buy up to 49% stake in Indian carriers. Following FIPB’s approval, the Cabinet Committee on Economic Affairs will take a look at the deal. “We have approved the
Jet-Etihad deal with some conditions,” economic affairs secretary Arvind Mayaram said after a meeting of the FIPB.
The FIPB nod is subject to several conditions. To begin with, future changes in the shareholding pattern or the shareholders’ agreement must be approved by the government while the articles of association of Jet Airways will override the shareholders’ pact between Jet and Etihad. Moreover, all disputes between the shareholders of Jet Airways will be arbitrated under Indian laws; in its proposal, Jet had suggested that legal disputes be sorted out under English laws. Lastly, executive chairman Naresh Goyal will have powers to bring any matter to the board even without a three-fourth majority; the initial proposal did not allow a non-executive chairman to bring a proposal to the board without a three-fourths majority.
The shareholding pattern of Jet Airways, cleared by FIPB on Monday says 51% of the airline will be held by Naresh Goyal, a non-resident Indian (NRI), 24% by Etihad and 25% by public shareholders.
In the latest amendment to the shareholders’ agreement, Etihad has agreed to reduce the number of seats on the Jet Airways board to two from the previous three. The promoters of Jet Airways will have four members and there will be six independent members against seven proposed earlier.
The two airlines also agreed to remove the clause from the commercial co-operation agreement (CCA) which would have shifted the revenue management and network operations offices of Jet Airways to Abu Dhabi. Instead, the two airlines would open ‘centres for excellence’ in the two countries to enable employees to learn global best practices.
Etihad’s views on management appointments would be recommendatory as per the revised agreement. The Abu Dhabi-based airline will also not have the right to appoint independent members on the nomination and audit committees of Jet’s board and Etihad’s members can only be appointed to the two committees if they are nominated by the board.
“Sebi has already cleared the deal, the civil aviation ministry’s concerns have been resolved and even the corporate affairs ministry was looking into the deal. We have followed all proper procedures,” civil aviation minister Ajit Singh said after the deal was cleared by the FIPB.
“The deal is good for the passengers and the civil aviation sector. We require a lot of foreign investment on our infrastructure side. The deal will also reaffirm investor confidence in the India growth story,” he said.
Monday’s conditional approval came after Jet-Etihad submitted a revised proposal to the government which assured that the control of the company would remain in Indian hands as envisaged in the policy on aviation FDI.
On April 24, Jet Airways and Etihad had agreed on a deal as per which the Abu Dhabi-based airline was to invest Rs 2,058 crore to pick up 24% stake in the Goyal-promoted airline. The deal was to be done via a preferential issue of shares to Etihad at Rs 754.53 per share. As part of the deal, Tail Winds, the former holding company of Jet Airways, would sell stake to Naresh Goyal. Naresh Goyal held 100% stake in Tail Winds, which was registered in Isle of Man.
The deal ran into hurdles with market regulator Securities and Exchange Board of India seeking changes to the shareholders’ agreement in May to ensure ‘effective control’ of Jet doesn’t slip into Etihad’s hands. The deal was subsequently reworked; still the FIPB deferred giving clearance to the proposal at its meeting on June 14.
Jet and Etihad yet again reworked the shareholders’ agreement and submitted the same to the FIPB on July 26. “Sebi has told the finance ministry that Jet and Etihad have addressed the market regulator’s concerns on effective control; so that matter has been resolved,” said the finance ministry official quoted above. “There are also no issues regarding the NRI ownership in the airline in the form of Naresh Goyal. Revenue department officials were also present at the meeting on Monday.”
Jet’s shares, which had rallied 25% over the last two trading sessions on the BSE, closed 4.22% higher on Monday at Rs 412.20.