Ban on foreign airline FDI in domestic carriers to remain

Written by Economy Bureau | New Delhi | Updated: Feb 18 2009, 06:25am hrs
Closed skies
The government on Tuesday made it clear that foreign airlines would not be permitted to pick up stakes directly or indirectly in the countrys commercial airline sector. This will scupper the plans of carriers like Kingfisher, which is reported to be scouting foreign airlines as an equity partner.

The government told Parliament that no foreign airlines would be allowed to participate directly or indirectly in the equity of an air service undertaking. The clarification by minister of state for industry Ashwani Kumar is significant as it makes the rules compliant with the civil aviation ministrys own FDI guidelines.

The need for Tuesdays statement arose as the recently announced relaxations in FDI norms issued by Kumars department offered scope for interpretation that foreign airlines could also invest in domestic airlines. The new guidelines defined an Indian-owned and controlled company as one where over 50% of its equity is held by resident Indians. Investments by such entities in domestic companies would not be counted as foreign investment, even if they had foreign partners.

Theoretically, a foreign airline invested in, say, sub-sectors like MRO, training institutes and helicopter/seaplane services, where there is no FDI cap, could be used as a launching pad to invest in an Indian airline, experts reckoned. But in the sector specific guidelines released on Tuesday, the government ruled out any scope for such interpretation.

Experts said this clarification would ensure that FDI does not enter the commercial airlines sector, even through the indirect route. The detailed guidelines mean that the ban on FDI in the commercial airlines sector continues despite the liberalised norms. Since there is no scope for any other interpretation, no foreign airline will enter the sector through the indirect route, said Pallavi Joshi Bakhru, partner (tax & regulatory services), Grant Thornton.

Entry of foreign airlines over the domestic airspace has been a sensitive subject. The government and even sections of industry have supported the plan to keep the sector free of foreign capital, except for portfolio investment.

But Vivek Gupta, a partner at consultancy firm BMR Advisors, was more optimistic. The clarification only states an existing policy guideline. The new guideline on FDI gives us a construct to determine how to reckon FDI from a sectoral cap perspective. He said the overall new foreign investment regime is more focused on who wields control in a company instead of being bogged down by whether the respective holdings are Indian or foreign.

The government announced a set of sweeping changes in FDI norms to bring them in line with global standards. It has made redundant sectoral caps and instead shifted the yardstick to whether an investment qualified as foreign contingent on the management structure of the investor firm. Thus, in sensitive sectors the investing companys ownership and control should remain with resident Indians, it states.

Also to ensure uniformity, FIPB approval would be required in all cases where ownership and control of an Indian firm is transferred to foreign entities as a consequence of share transfer through M&As and amalgamations. This would apply to all sectors where there are caps on foreign direct investment.