FDI in Airlines

In a major relief to financially distressed Indian carriers, the government said foreign airlines would soon be allowed to acquire up to 49% stake in them. After being debated for years, new aviation minister Ajit Singh announced this move following a meeting with finance minister Pranab Mukherjee in the backdrop of at least two big airlines struggling to avoid a shutdown due to financial troubles and others desperately looking for funds. The aviation ministry was initially in favour of a 24% cap which was later relaxed to 26% to attract foreign airlines as this would give them some say in running of theairline. However, the sheer scale of financial stress forced the government to raise the cap to 49%. The same reason also led to the sidelining of old security fears that such a move would only bring money from airlines in the Gulf and China which had till now held up clearing of this move. Indian carriers face an accumulated debt of $16 billion (over 80,000 crore) on top of cumulative losses of $6 billion (over 30,000 crore). By the end of March 2012, losses are expected to mount to $8.5 billion (over 43,000 crore). The debt is projected to rise by another $3-4 billion (up to 22,000 crore) if Air India goes ahead with its Boeing 787 order
Airline promoters like Vijay Mallya, chairman of Kingfisher Airlines, have supported 49% FDI for foreign carriers. Sebi has also expressed its reluctance to relax the takeover code guidelines to permit foreign carriers to acquire shares from the public through an open offer for an additional 26%. By seeking an exemption, the government had hoped to stay within the sectoral FDI cap. Kingfisher and AI are struggling to survive and other carriers remain under-capitalized. Ajit Singh said FDI was among the important things required by airlines to survive financial turbulence. Indian carriers can expect investment from foreign airlines after a gap of 16 years. The policy was reversed in 1996 when Tata-Singapore Airlines planned a foray into the Indian airspace via ajoint venture. At that point, Naresh Goyal-owned Jet Airways had to buy back its 40% stake held equally by Gulf Air and Kuwait Airlines. CAPA India head Kapil Kaul expects cashrich Gulf carriers and Singapore Airlines to be among those looking to invest in India, apart from British Airways that has already declared its intent to put money in where opportunity exists. There are indications that BA might bail out Kingfisher through FDI and Mallya’s troubled airline is set to join BA-led OneWorld alliance next month.