Security riders on stake buy by foreign airlines

Written by Nirbhay Kumar | Sunny Verma | New Delhi | Updated: Feb 4 2012, 11:06am hrs
The governments proposed policy allowing foreign carriers to pick up stakes in Indian airline companies will come with certain security riders. The civil aviation ministry is likely to restrict investments by carriers from countries considered sensitive by the security establishment.

According to sources, although these security conditions may not be spelt out for the public, investments from such countries will be put under tighter scrutiny. Such foreign direct investment (FDI) proposals could be routed through the home ministry for clearance and the investor could be asked to provide details such as sources of funds and parentage.

The governments plan is to allow foreign airlines to buy up to 49% stake in the cash-strapped, debt-laden Indian carriers. Already, there are country-specific restrictions for FDI in sensitive sectors such as telecom, nuclear energy, oil and gas and mining.

The potential security threats identified by the government include hijacking of aircraft or terrorists using airplanes as missiles to carry out attacks like 9/11 attack in the US. It is also feared that investment from certain countries and entities could form part of larger global network on terror funding and cause severe harm to the countrys interests.

In the coming meeting of a group of ministers (GoM) on aviation sector on February 9, the ministry would suggest ways to block foreign investment from countries posing security threats. It would also write to the economic affairs department in the finance ministry for relaxing Sebi take-over code in case of foreign carriers picking up a stake in Indian airlines.

The government may mandate foreign carriers to seek home ministry clearance before investing and subject the foreign investors to stricter scrutiny. Foreign Investment Promotion Board (FIPB) could be asked to carry out a thorough due diligence including checking the source of funding, past credentials and ownership structure of the prospective investor, sources said.

We would put certain restrictions to address security concerns. With regards to waiver of the Sebi take-over code we are going to write to the department of economic affairs, a senior aviation ministry official told FE.

As per the new code unveiled about four months ago, any entity buying more than a 25% stake in a listed company has to make an open offer to buy an additional 26%.

So in case a foreign carrier picks up 26% stake in an Indian airline, the former would have come up with an open offer, raising its stake to 51% in the latter--which would violate the FDI cap being proposed for the sector.

The government would either have to amend the Takeover Code, or give aviation sector an exemption from this open offer rule.

The official said that the aviation ministry would send its formal proposal on the key policy change to the Department of Industrial Policy and Promotion (DIPP), the nodal government department for formulating FDI guidelines.